CU Association Archives - Page 6 of 27

NASCUS Summary re: Interagency Guidance on Reconsiderations of Value for Residential Real Estate Valuations
12 CFR Chapter X

The Fed, CFPB, FDIC, NCUA and OCC issued final guidance that highlights risks associated with highlights risks associated with deficient residential real estate valuations and describes how financial institutions may incorporate reconsiderations of value (ROV) processes and controls into established risk management functions. The final guidance also provides examples of policies and procedures that a financial institution may choose to implement to help identify, address, and mitigate the risk of discrimination impacting residential real estate valuations.

The guidance became effective on July 26, 2024 and can be found here.

Summary

The guidance is intended to highlight risks associated with deficient residential real estate valuations, describe how financial institutions may incorporate ROV processes and controls into risk management functions, and provide examples of ROV policies and procedures that institutions may choose to implement. Prior to this issuance, the agencies had not (collectively) issued guidance specific to the ROV process.

The regulatory framework permits financial institutions to implement reconsideration of value (ROV) policies, procedures and control systems that allow consumers to provide and the financial institution to review, relevant information that may not have been considered during the appraisal or evaluation process.

A reconsideration of value (ROV) request made by the financial institution to the appraiser or other preparer of the valuation report encompasses a request to reassess the report based upon deficiencies or information that may affect the value conclusion. The financial institution may request a ROV because of the financial institution’s valuation review activities or after consideration of information received from a consumer through a complaint or request to the loan officer or other lender representative.

A reconsideration of value (ROV) request may include consideration of comparable properties not previously identified, property characteristics, or other information about the property that may have been incorrectly reported or not previously considered, which may affect the value conclusion. To resolve deficiencies, including those related to potential discrimination, financial institutions can communicate relevant information to the original preparer of the valuation, and, when appropriate, request an ROV.

Financial institutions are advised to capture consumer feedback regarding potential valuation deficiencies through existing complaint resolution processes.

Appropriate policies, procedures, and control systems can adequately address the monitoring, escalating, and resolving of complaints including a determination of the merits of the complaint and whether a financial institution should initiate an ROV. The guidance provides a list of examples of risk-based ROV related policies, procedures, control systems and complaint resolution processes that identify, address, and mitigate the risk of deficient valuations, including valuations that involve prohibited discrimination.

National Credit Union Administration Incentive-Based Compensation Arrangements

NASCUS Legislative and Regulatory Affairs Department
August 2024

On July 18, 2024, the NCUA Board, in a 2 to 1 vote, issued a joint proposed rulemaking related to incentive-based compensation arrangements. The joint rulemaking includes the FDIC, OCC, and FHFA (Agencies). The rulemaking is a “re-proposal” of an earlier proposed rule by the agencies in 2016. [1]

The Board of Governors of the Federal Reserve System and the U.S. Securities and Exchange Commission have not approved the joint rulemaking yet. Once all six agencies adopt the notice of proposed rulemaking, it will be published in the Federal Register with a comment period of 60 days following publication.

Agencies will consider comments received in response to the 2016 proposed rule and any comments received in response to this re-proposal when determining how to implement section 956 of the Dodd-Frank Act.

NCUA is accepting comments on the proposed rule until September 16, 2024.

Summary

Covered Entities and Individuals

The proposed rule, like that of the 2016 rule, divides credit unions (and other covered entities) into three categories:

Level 1 (greater than or equal to $250 billion);
Level 2 (greater than or equal to $50 billion and less than $250 billion); and
Level 3 (greater than or equal to $1 billion and less than $50 billion).

While most of the proposed rule applies only to Level 1 and 2 entities, NCUA reserves the authority to require a Level 3 credit union to comply with provisions intended for the larger Level 1 & 2 credit unions.

The rule would apply to any “senior executive” or “significant risk taker” (Level 1 & 2 credit unions only) who receives incentive-based compensation.

Disclosure and Recordkeeping Requirements

All Level 1 and 2 credit unions would be required to create annually and maintain for at least seven years records that document:

Senior executive officers and significant risk-takers, listed by legal entity, job function, organizational hierarchy, and line of business;
Incentive-based compensation arrangements for senior executive officers and significant risk-takers, including information on the percentage of incentive-based compensation deferred and form of award;
Any forfeiture and downward adjustment or clawback reviews and decisions for senior executive officers and significant risk-takers; and
Any material changes to the covered institution’s incentive-based compensation arrangements and policies.

Deferral, Forfeiture and Downward Adjustment, and Clawback Requirements (Level 1 and 2 only)

Deferral

For Level 1 and 2 credit unions, deferral requirements would apply to significant risk-takers and senior executive officers, and would require 40, 50, or 60 percent deferral depending on the size of the covered institution and whether the covered person receiving the compensation was a senior executive officer or significant risk-taker. Deferral periods range from one to four years depending on the type of compensation arrangement, the size of the credit union, and whether the covered person receiving the compensation was a senior executive officer or significant risk-taker.

Forfeiture and Downward Adjustment

A covered credit union would be required to make subject to forfeiture all unvested deferred incentive-based compensation of any covered person, including unvested deferred amounts awarded under long-term incentive plans.

A covered credit union would also be required to make subject to downward adjustment all incentive-based compensation amounts not yet awarded to any covered person for the current performance period, including amounts payable under long-term incentive plans.

A covered credit union would be required to consider forfeiture or downward adjustment if any of the following adverse outcomes occurred:

Poor financial performance attributable to a significant deviation from the credit union’s risk parameters set forth in the credit union’s policies and procedures;
Inappropriate risk-taking, regardless of the impact on financial performance;
Material risk management or control failures;
Non-compliance with statutory, regulatory, or supervisory standards resulting in enforcement or legal action brought by a federal or state regulator or agency, or a requirement that the credit union report a restatement of a financial statement to correct a material error; and
Other aspects of conduct or poor performance as defined by the credit union.

Clawback Provisions

Covered credit unions would be required to include clawback provisions in the incentive-based compensation arrangements for senior executive officers and significant risk-takers that, allow the credit union to recover incentive-based compensation from a current or former covered person for seven years following the date on which such compensation vests, if the credit union determines the covered person engaged in misconduct that resulted in significant financial or reputational harm to the credit union, fraud, or intentional misrepresentation of information used to determine the cover persona’s incentive-based compensation.

Additional Prohibitions (Level 1 and 2 only)

Hedging: Level 1 or 2 credit unions would be prohibited from purchasing a hedging instrument on behalf of a covered person to hedge or offset any decrease in value of the covered person’s incentive-based compensation.
Maximum incentive-based compensation opportunity (leverage): Level 1 or 2 credit unions would be prohibited from awarding incentive-based compensation to a senior executive officer in excess of 125 percent of the target amount for that incentive-based compensation. For a significant risk-taker the amount would be 150 percent of the target amount.
Relative performance measures: Level 1 or 2 credit unions would be prohibited from providing incentive-based compensation to a covered person based solely on transaction revenue or volume without regard to transaction quality or compliance with sound risk management.

Risk Management and Controls

The proposed rule would require all Level 1 and 2 credit unions to have a risk management framework for their incentive-based compensation programs that is independent of any lines of business, including an independent compliance program, and is commensurate with the size and complexity of the credit union’s operations. Level 1 and 2 credit unions would be required to:

Provide individuals in control functions with the appropriate authority to influence the risk-taking of the business areas they monitor, and sure covered persons engaged in control functions are compensated in accordance with the achievement of performance objectives linked to their control functions and independently of performance of the business areas they monitor; and
Provide for independent monitoring of:
- Incentive-based compensation plans to identify whether the plans appropriately balance risk and reward;
- Events related to forfeiture and downward adjustment and decisions of forfeiture and downward adjustment reviews to determine consistency with the proposed rule; and
- Compliance of the incentive-based compensation program with the credit union’s policies and procedures.

Governance

The proposed rule would require Level 1 or 2 credit unions to establish a compensation committee composed solely of directors who are not senior executive officers. The committee would be required to:

Obtain input from the credit union risk and audit committees, risk management function, and include an independent written risk assessment.
Management would be required to submit to the committee on an annual or more frequent basis, a written assessment of the effectiveness of the credit union’s incentive-based compensation program.
Internal audit or risk management function would also be required to submit an independent written assessment, developed independently of the credit union’s management, to the compensation committee on an annual or more frequent basis.

Policies and Procedures

Level 1 and 2 credit unions would be required to have policies and procedures that:

Are consistent with the requirements and prohibitions of the proposed rule;
Specify the procedures for forfeiture and clawback;
Document final forfeiture, downward adjustment, and clawback decisions;
Specify the substantive and procedural criteria for the acceleration of payments of deferred incentive-based compensation to a covered person;
Describe the role of any employees, committees, or groups authorized to make incentive-based compensation decisions, including when discretion is authorized;
Describe how discretion is exercised to achieve balance;
Document processes for the establishment, implementation, modification, and monitoring of incentive-based compensation arrangements;
Describe how incentive-based compensation arrangements will be monitored;
Describe procedures for the independent compliance program; and
Ensure appropriate roles for risk management, risk oversight, and other control functions.

[1] 81 FR 37673 (June 10, 2016)

National Credit Union Administration: Succession Planning

NASCUS Legislative and Regulatory Affairs Department
August 8, 2024

On February 3, 2022, the NCUA Board (Board) published a proposed rule to require only Federal credit union (FCU) boards of directors to establish processes for succession planning for key positions. At the July 18, 2024, meeting of the Board, the Board approved, in a 2-1 decision, a proposed rule addressing succession planning.

The new proposal is based on the 2022 proposed rule but also includes several changes that the Board believes will further strengthen succession planning efforts for both consumer FICUs. This latest proposed rule also includes consumer federally insured, State-chartered credit unions (FISCUs), previously excluded from the 2022 proposed rule.

Comments on the proposed rule are due by September 23, 2024.

Background

The proposed rule indicates several factors that have contributed to the increased relevance of succession planning for FICU boards. The credit union system has seen a significant decline in the number of FICUs which the NCUA states is attributable to the long-running trend of consolidation across all depositories. The proposed rule also notes that data suggests smaller FICUs may be more likely to merge.

Increased Relevance of Succession Planning

The preamble to the proposed rule highlights several factors that the Board believes contribute to the increased relevance of succession planning for FICUs. One item of note in the preamble indicates that “data suggests that smaller FICUs may be more likely to merge.” Statistics provided state: “At the close of 2015, there were 1,816 FICUs with less than $10 million in assets. By the third quarter of 2023, the number of these smallest FICUs was 938. By comparison, during the same period, the number of FICUs with assets of at least $1 billion decreased from 424 to 414.”

The preamble also indicates that NCUA analysis found “poor succession planning was either a primary or secondary reason for almost a third of FICU consolidations.”

NCUA’s Efforts to Strengthen FICU Succession Planning Efforts

In March 2022, the NCUA issued Letter to Credit Unions 22-CU-05, CAMELS Rating System, which provides that “succession planning for key management positions” is a key factor considered when assessing the management of a credit union. The Letter to Credit Unions 23-CU-01 included succession planning as one of the NCUA’s supervisory priorities for 2023.

While the NCUA does assess succession planning as part of the CAMELS Management component, there is no NCUA regulation requiring FICUs to implement a formal, written succession plan. As a result, the NCUA lacks a full complement of regulatory tools to help address deficiencies in a FICU’s succession planning process. For example, Letter to Credit Unions 23-CU-01 makes clear that NCUA examiners are precluded from evaluating “any formal or informal succession plans developed by credit unions beyond what would normally be considered in assigning the Management component of the CAMELS rating.”

Moreover, examiners may “not issue an Examiner’s Finding or Document of Resolution if the credit union has not conducted succession planning, or the planning is not adequate, unless the credit union violates its policy for conducting succession planning or administering any such plan(s).”

The Board believes the absence of specific regulations on this topic also means there are no requirements as to what constitutes an acceptable succession plan and therefore believes establishing standards within regulation is necessary.

Summary

As previously discussed, the proposed rule would apply to all consumer federally insured credit unions and proposes new requirements by amending part 701 of its regulations. The proposal would also make these amendments applicable to FISCUs through an amendment to 12 CFR part 741, subpart B, by adding a new 741.228.

The proposal notes that the Board recognizes the importance of state law in FISCUs’ internal governance and that states may already have state-specific succession planning requirements. It also notes, that to the extent that a FISCU is subject to a state statutory or regulatory requirement that conflicts with the proposed rule, the NCUA will defer to state law.

Plan Requirements

The proposal would require the following:

The FICU board of directors must establish a written succession plan addressing specified positions (or the equivalent if the FICU has adopted different position titles):
- Members of the board of directors;
- Members of the supervisory committee;
- Members of the credit committee;
- Loan officers (where provided for in the bylaws in lieu of a credit committee and the loan officers are involved in the daily review of loans)
- Management officials and assistant management officials;
- “Senior executive officers” as defined in 12 CFR 701.14 and any other FICU personnel the board deems critical given the FICU’s size, complexity, or risk of operations.
The board would be required to review the succession plan by a schedule it establishes, but no less than annually;
Identify the title of the incumbent for each covered position, the expiration date of the incumbent’s term, or other anticipated vacancy date (e.g., retirement);
Describe the FICU’s general plan or strategy for temporarily and permanently filling vacancies for each of the positions including vacancies due to unexpected circumstances;
Required to address the FICU’s strategy for recruiting candidates;
- The strategy must consider how the selection and diversity among covered employees collectively and individually promotes the safe and sound operation of the FICU as well as budgetary impacts in the development of the plan.

The proposed rule would also amend 701.49(b)(3), which sets forth certain education requirements for FCU directors, to require that directors have working familiarity with the FCU’s succession plan no later than 6 months after appointment. This amendment would be made applicable to FISCUs through the newly proposed 741.228.

NCUA expects succession plans to be consistent with the size and complexity of each FICU and therefore has indicated in the proposed rule they will consider the size of the FICU, as well as the complexity and risk of its operations.

Small FICU Considerations

NCUA believes that small FICUs may be most likely to benefit from this proposed rule. The proposed rule includes a template for succession planning that may be appropriate for some smaller FICUs, though they note all FICUs may benefit from it. The proposal also states that FISCUs electing to use the template should consult applicable state requirements to ensure their succession plans are consistent with any such requirement.

NASCUS Summary re: CFPB Proposal on Streamlining Mortgage Servicing for Borrowers Experiencing Payment Difficulties
12 CFR Part 1024

The Consumer Financial Protection Bureau (CFPB) is proposing a rule that would amend its 2013 mortgage servicer responsibilities regulations. The proposed amendments would streamline existing requirements when borrowers seek payment assistance in times of distress. The rule would also require servicers to provide certain communications in languages other than English.

Comments must be received by September 9, 2024. The proposal rule can be found here.

Summary

The CFPB is proposing and seeking comment on key changes related to assisting borrowers during loss mitigation and early intervention. None of the proposed requirements would apply to small servicers (as defined in Regulation Z, Section 1026.41)

Streamlined loss mitigation procedures and foreclosure procedural safeguards

The proposal looks to streamline Regulation X’s loss mitigation procedures by removing most of the existing requirements regarding incomplete and complete loss mitigation applications and replacing them with a new framework based on foreclosure procedural safeguards. Under the proposed framework:

A servicer would not be required to collect a complete application prior to making a loss mitigation determination and would have flexibility to review a borrower for loss mitigation options sequentially rather than simultaneously.
Once a borrower makes a request for loss mitigation assistance, the loss mitigation review cycle begins. It continues until either the borrower’s loan is brought current or one of the following foreclosure procedural safeguards is met: (i) the servicer reviews the borrower for all available loss mitigation options and no available options remain, or (ii) the borrower remains unresponsive for a specified period of time despite the servicer regularly taking steps to reach the borrower.
The CFPB proposes to remove currently required loss mitigation notices that would no longer be necessary under the new proposed framework.

Early Intervention Changes

The CFPB is proposing to require servicers to provide certain additional information in written early intervention notices, including among other things, the name of the owner or assignee of the borrower’s mortgage loan, a brief description of each type of loss mitigation option, as well as a website to access a list of all loss mitigation options may be available from that owner/assignee.
The CFPB is also proposing a partial exemption for servicers from early intervention requirements while a borrower is performing under a forbearance, new live contact and written notice requirements when a borrower’s forbearance is nearing its scheduled end, and timing for resuming compliance with early intervention when a borrower’s forbearance ends.

Loss mitigation determination notices and appeals

The CFPB is proposing to require that servicers provide loss mitigation determination notices and appeal rights to borrowers regarding all types of loss mitigation options.
The CFPB also is proposing to require servicers to include additional information in determination notices including borrower-provided inputs that served as the basis for the determination; a list of other loss mitigation options that are still available to the borrower, or if applicable, a statement that the servicer has reviewed the borrower for all available loss mitigation options and none remain; and, if applicable, a list of any loss mitigation options that the servicer previously offered to the borrower that remain available but that the borrower did not accept. The CFPB is also proposing to clarify that loss mitigation determinations are subject to the notice of error procedures contained in Section 1024.35.

Language Access

CFPB is proposing several requirements to provide borrowers with limited English proficiency greater access to certain early intervention and loss mitigation communications in languages other than English.

The proposal would require mortgage servicers to provide Spanish-language translations of certain written communications to all borrowers.
The proposal would also require servicers to make certain written and oral communications available in multiple languages and to provide those translated or interpreted communications upon borrower request.
The proposal would require servicers to include brief translated statements in certain written communications notifying borrowers of the availability of the translations and interpretations, and how they can be requested. It would also require that borrowers who received marketing for a loan in a language other than English receive specific early intervention and loss mitigation communications in that same language upon the borrower’s request.

Credit Reporting

The CFPB is concerned that mortgage servicers may be furnishing information about borrowers undergoing loss mitigation review that may not be accurate or consistent.
The Bureau is not proposing any regulatory changes regarding credit reporting at this time. However, the CFPB is requesting comment about possible approaches it could take to ensure servicers are furnishing accurate and consistent credit reporting information about borrowers undergoing loss mitigation review.

The Bureau is interested in receiving feedback on all aspects of the proposed rule and will accept comments until September 9, 2024.

National Credit Union Administration Anti-Money Laundering and Countering the Financing of Terrorism Program Requirements

NASCUS Legislative and Regulatory Affairs Department
July 24, 2024

Background

The OCC, FRB, FDIC, and the NCUA (the “Agencies”) have published a notice of proposed rulemaking and request for comment that would amend the requirements each Agency has issued for its supervised entities under the Bank Secrecy Act. For purposes of this summary, we will refer specifically to the NCUA.

The amendments are intended to align with the changes concurrently proposed by FinCEN as required by the AML Act of 2020.

NASCUS summary of FinCEN’s proposal can be found here.

The proposed rule incorporates a risk assessment process in the AML/CFT program rules that requires consideration of the national AML/CFT Priorities published by FinCEN. Additionally, the proposed rule would add customer due diligence requirements to reflect prior amendments to FinCEN’s rule and, concurrently with FinCEN, propose clarifying and other amendments to codify longstanding supervisory expectations and conform to AML Act changes.

Comments will be due 60 days after the proposed rule is published in the Federal Register.

Summary

The proposed rule would make several changes to NCUA’s BSA compliance program rules. As previously discussed, the main reason for the proposed changes is that NCUA and the Agencies’ BSA compliance program rules will remain aligned with FinCEN’s rule to avoid confusion and additional burdens upon supervised entities.

Proposed Rule

1. Purpose Statement
Like FinCEN, NCUA is proposing a statement describing the purpose of an AML/CFT program requirement which is: “To ensure that each bank implements an effective, risk-based, and reasonably designed AML/CFT program to identify, manage, and mitigate illicit finance activity risks that: complies with the requirements of subchapter II of chapter 53 of title 31, United States Code, and the implementing regulations promulgated thereunder by the Department of the Treasury at 31 CFR chapter X; focuses attention and resources in a manner consistent with the risk profile of the bank; may include consideration and evaluation of innovative approaches to meet its AML/CFT compliance obligations; provides highly useful reports or records to relevant government authorities; protects the financial system of the United States from criminal abuse; and safeguards the national security of the United States, including by preventing the flow of illicit funds in the financial system.”

The statement is intended to summarize the overarching goals of credit unions’ effective, risk-based, and reasonably designed AML/CFT programs.

2. Establishment and Contents of an AML/CFT Program

Establishment: As addressed in FinCEN’s proposed rule, a credit union must establish, implement, and maintain an effective, risk-based, and reasonably designed AML/CFT program. While financial institutions are already required to maintain a “reasonably designed AML/CFT program, the proposal would add the terms “effective” and “risk-based” to the existing requirements.
Also reflective of FinCEN’s proposal, NCUA is proposing to add the terminology “AML/CFT” to this rule, consistent with the AML Act.
AML/CFT Program: The proposed rule establishes the following minimum requirements and are not meant to stand alone, but rather form the basis of an effective AML/CFT program:
- A risk assessment process that serves as a basis for the credit union’s AML/CFT program;
- Reasonable management and mitigation of risks through internal policies, procedures, and controls;
- A qualified AML/CFT officer;
- An ongoing employee training program;
- Independent, periodic testing conducted by qualified personnel of the bank or by a qualified outside party; and
- Customer due diligence

NASCUS would like to highlight while the AML Act did not change the existing BSA requirement that each credit union designate a compliance officer as part of its BSA compliance program, the NCUA is proposing clarifying and technical changes to this subsection to codify existing regulatory expectations and conform to FinCEN’s proposal.

Accordingly, for an AML/CFT program to be effective, reasonably designed, and risk-based, the compliance officer must be qualified. Based on the experience of the Agencies in examining BSA compliance programs, the compliance officer’s qualifications (i.e., the requisite training, skills, expertise, and experience) need to be commensurate with the bank’s ML/TF and other illicit finance activity risks.

In addition to qualifications, the proposed rule states the credit union’s organizational structure must enable the compliance officer to effectively implement the credit union’s AML/CFT program. This means this individual’s authority, independence, and access to resources within the credit union is critical.

3. Board Oversight
Although not a new requirement to some FIs, the NPRM requires documentation of the AML/CFT program. In addition, the AML/CFT program must be approved by and overseen by the board of directors (or equivalent governing body). This is not a new practice for credit unions. Finally, the proposal contains new oversight requirements, such as governance mechanisms, escalation, and reporting lines, to ensure the board properly oversees the AML/CFT program.

4. Presence in the United States
Section 6101(b)(2)(C), of the AML Act, provides that the duty to establish, maintain, and enforce a bank’s AML/CFT program shall remain the responsibility of, and be performed by, persons in the United States who are accessible to, and subject to oversight and supervision by, the Secretary of the Treasury and the appropriate Federal functional regulator. The proposed rule would incorporate this statutory requirement into the AML/CFT program rule by restating that the duty to establish, maintain, and enforce the AML/CFT program must remain the responsibility of, and be performed by, persons in the United States who are accessible to, and subject to the oversight and supervision by, the relevant Agency.

5. Customer Identification Program
There are no changes to the current CIP requirements. The proposed rule would only move them to a separate section.

Request for Comment

The proposed rule consists of twenty-seven questions separated into the following categories:

Incorporation of AML/CFT Priorities
Risk Assessment Process
Updating the Risk Assessment
Effective, Risk-Based, and Reasonably Designed
Other AML/CFT Program Requirements
Innovative Approaches
Board Approval and Oversight; and
Duty to establish, maintain, and enforce an AML/CFT Program in the United States

Financial Crimes Enforcement Network (FinCEN): Anti-Money Laundering and Countering the Financing of Terrorism Programs

NASCUS Legislative and Regulatory Affairs Department
July 15, 2024

NASCUS summary of NCUA’s proposal can be found here.

Background

FinCEN has proposed a rule to “strengthen and modernize financial institutions’ anti-money laundering and countering the financing of terrorism (AML/CFT) programs according to the Anti-Money Laundering Act of 2020 (AML Act).”

FinCEN intends for these updates to:

Reinforce the risk-based approach for AML/CFT programs;
Make AML/CFT programs more dynamic and responsive to evolving ML/TF risks;
Ultimately render AML/CFT programs more effective in achieving the purposes of the BSA; and
Reinforce the focus of AML/CFT programs toward a more risk-based innovation, and outcomes-oriented approach to combating illicit finance activity risks and safeguarding national security.

The Bank Secrecy Act (BSA) requires financial institutions to establish AML/CFT programs that include (at a minimum):

Development of internal policies, procedures, and controls;
The designation of a compliance officer;
Ongoing employee training programs; and
An independent audit function to test programs.

The AML Act of 2020 amended the BSA in several ways. This proposal addresses changes to the existing AML program requirements, including inserting “countering the financing of terrorism” (CFT) when describing AML program requirements. The proposed rule applies broadly to any “financial institution” as defined in 31 CFR §1010.100(t) and (ff).[1]

Comments on the proposed rule are due by September 3, 2024.

Summary

What is Changing?

Purpose Statement

The NPRM would add a new policy statement describing the purpose of an AML/CFT program under the newly proposed program rules. The NPRM proposes the following policy statement:

“The purpose of this section is to ensure that a financial institution implements an effective, risk-based, and reasonably designed AML/CFT program to identify, manage, and mitigate illicit finance activity risks that: complies with the Bank Secrecy Act and the requirements and prohibitions of this chapter; focuses attention and resources in a manner consistent with the risk profile of the financial institution; may include consideration and evaluation of innovative approaches to meet its AML/CFT compliance obligations; provides highly useful reports or records to relevant government authorities; protects the financial system of the United States from criminal abuse; and safeguards the national security of the United States, including by preventing the flow of illicit funds in the financial system.”

Risk Assessment Process:

AML/CFT Priorities

The proposal makes numerous changes to the overall risk assessment process. It codifies the requirement that all financial institutions must have a risk assessment as part of an effective, risk-based, and reasonably designed AML/CFT program. The risk assessment is intended to serve as the foundation for the overall AML/CFT program and must contain certain components.

Risk assessments are already common practice among credit unions and are existing expectations of regulators and examiners, however, they are not “required” by regulation. The proposed rule now explicitly expresses a risk assessment as a requirement. The risk assessment will require several components.

The first required component of the risk assessment is the inclusion of the AML/CFT priorities. Section 6101 of the AML Act requires FIs to review and incorporate the AML/CFT priorities set by FinCEN. The NPRM indicates that the inclusion of the AML/CFT priorities ensures that FIs understand risk exposure in important areas at a national level.

In 2021, FinCEN issued the AML/CFT priorities. As a reminder, these eight priorities are:

Corruption;
Cybercrime;
Domestic and international terrorist financing;
Fraud;
Transnational criminal organizations;
Drug trafficking organizations;
Human trafficking and human smuggling; and
Proliferation financing.

The proposed rule provides minimal detail on how FIs should consider the priorities in their risk assessment. While the proposal indicates flexibility in documenting the results of a risk assessment, the risk assessment will now be subject to greater examiner scrutiny.

Business Activities

The risk assessment must also include the risks unique to FIs based on business activities including:

Products;
Services;
Distribution channels;
Customers;
Intermediaries; and
Geographic locations

Many of these items are already incorporated into FI risk assessment processes, however, unique to this proposal from current processes is the attention on “distribution channels” and intermediaries” as potentially new concepts for certain FIs.

A “distribution channel” refers to the methods and tools used to open accounts, e.g., online account opening.
An “intermediary” refers to non-customer third-party relationships that allow financial activities by, at, or through a FI, that facilitates the introduction or processing of financial transactions, financial products and services, and customer-related financial activities.

The proposal provides that FIs may use sources for determining potential risks such as information from 314(a) or (b) information sharing programs, payment transactions with other FIs that have been flagged or returned due to AML/CFT concerns, or feedback from regulators and law enforcement. It is important to note that the NPRM states any “exercise of discretion or judgment” with the analysis performed in connection with the risk assessment process should be documented and subject to oversight and governance. The proposal also indicates “information obtained by marketing and business components of the FI can be relevant to the risk assessment created by the compliance component.”

BSA Reports

The proposal indicates the last required component of a risk assessment is the review of any reports filed by FIs pursuant to 31 CFR Chapter X. This may include Suspicious Activity Reports (“SARs”), Currency Transaction Reports (CTRs), Forms 8300, and any other relevant BSA reports.

FinCEN believes the review of these reports may assist FIs in understanding patterns or trends to incorporate into the risk assessment.

Frequency

FIs are already updated risk assessments periodically with the introduction of new products and services or the opening of a new branch location. The proposed rule would require, at a minimum, FIs update their risk assessment using the process outlined above, when there are material changes in their products, services, distribution channels, customers (members), intermediaries, and geographic locations.

Internal Policies, Procedures, and Controls

The proposed rule would require AML/CFT Programs to “reasonable manage and mitigate ML/TF risks to the FI through internal policies, procedures, and controls that are “commensurate with those risks and ensure ongoing compliance with the BSA and its implementing regulations.” The Bank Secrecy Act requires FIs to develop “internal policies, procedures, and controls” therefore this should not be a significant lift for FIs to update, with the focus on FIs managing and mitigating illicit activity risks.

Of note – the proposed rule provides financial institutions with the regulatory flexibility to consider innovative approaches to comply with BSA requirements, including determining not only the total amount of resources but also the nature of those resources. The proposed rule’s inclusion of innovation reflects one of the AML Act’s key purposes of “encourage[ing] technological innovation and the adoption of new technology by financial institutions to more effectively counter money laundering and financing of terrorism.”

AML/CFT Officer

The proposed rule would provide that an AML/CFT program must designate one or more qualified individuals to be responsible for coordinating and monitoring day-to-day compliance with the requirements and prohibitions of the BSA and FinCEN’s implementing regulations. With this proposal, FinCEN is updating the reference in current regulation from “BSA officer” to “AML/CFT officer” to formally reflect the CFT considerations for this role under section 6101 of the AML Act. The proposal also states for the AML/CFT program to be effective, the AML/CFT officer must be “qualified.” Whether an individual is qualified will depend, in part, on the FI’s ML/TF risk profile, as identified by the results of the risk assessment process.

In addition, the AML/CFT officer’s position in the financial institution’s organizational structure must enable the AML/CFT officer to effectively implement the financial institution’s AML/CFT program. Importantly, an AML/CFT officer should have decision-making capability regarding the AML/CFT program and sufficient stature within the organization to ensure that the program meets the applicable requirements of the BSA.

Training, Documentation of AML/CFT Program, and Board Oversight

The proposed rule would amend the current training requirements to provide that, to be effective, risk-based, and reasonably designed, an AML/CFT program would need to include an ongoing employee training program that is also risk-based. The training program would be focused on areas of risk as identified by the risk assessment process and the frequency of training would be dependent on an FIs risk profile. Additionally, the language in the proposed rule shifts slightly to require “ongoing employee training” whereas current rules are directed at “appropriate persons or appropriate personnel.”

Although not a new requirement to some FIs, the NPRM requires documentation of the AML/CFT program. In addition, the AML/CFT program must be approved by and overseen by the board of directors (or equivalent governing body). This is not a new practice for credit unions. Finally, the proposal contains new oversight requirements, such as governance mechanisms, escalation, and reporting lines, to ensure the board properly oversees the AML/CFT program.

Additional Considerations

The proposed rule provides some additional and broader considerations for an effective risk-based AML/CFT program and framework as intended by the AML Act. For instance, as required under the BSA, FinCEN has considered the goal of extending financial services to the underbanked and facilitating financial transactions while preventing criminals from abusing financial services networks. With the proposal’s emphasis on risk-based AML/CFT programs, FinCEN is seeking to avoid a one-size-fits-all approach to customer risk that can lead to financial institutions declining to provide financial services to entire categories of customers.

Concerning enhanced feedback by law enforcement to FIs – another goal of the AML Act – the NPRM acknowledges the importance of such feedback and lists prior efforts by FinCEN to engage with industry groups but does not propose concrete regulations specifically addressing feedback from the government. Rather, the proposed rule suggests that FinCEN will continue its outreach programs and that the focus on the AML/CFT Priorities will facilitate such efforts.

The federal banking regulators have issued a proposal and request for comment to update their requirements for supervised institutions to establish, implement, and maintain effective, risk-based, and reasonably designed AML/CFT programs. The amendments are “intended to align with FinCEN’s proposal.

Request for Comment

The proposed rule includes forty-five questions on specific areas of the proposal under the following categories:

Purpose Statement
Incorporation of AML/CFT Priorities
Risk Assessment Process
Updating the Risk Assessment
Effective, Risk-Based, and Reasonably Designed
Metrics for Law Enforcement Feedback
De-Risking and Financial Inclusion
Other AML/CFT Program Components
Duty To Establish, Maintain, and Enforce an AML/CFT Program in the United States
Innovative Approaches
Board Approval and Oversight
Technical Updates
Implementation

[1] The definition of “financial institution includes: Banks, Casinos, Money Service Businesses (MSBs), Brokers or dealers in securities, Mutual funds, Insurance companies, Futures commission merchants, Dealers in precious metal, stones, or jewels, Credit card system operators, Loan or finance companies, Housing GSEs

NASCUS Summary re: CFPB Interim Final Rule on Small Business Lending Under the ECOA; Extension of Compliance Dates

12 CFR Part 1002

The Consumer Financial Protection Bureau (CFPB) is amending Regulation B to extend the compliance dates sets forth in its 2023 small business lending rule and to make other date-related conforming adjustments.

The Interim Final Rule is effective as of August 2, 2024. Comments must be received on or before August 2, 2024. The rule can be found here.

Summary

Dodd Frank amended the Equal Credit Opportunity Act (ECOA) to require that financial institutions collect and report to the CFPB certain data regarding applications for credit for women-owned, minority-owned and small businesses. Section 1071’s statutory purposes are to (i) facilitate enforcement of fair lending laws, and (ii) enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned and small businesses.

In March 2023, the CFPB issued a final rule to implement Section 1071. The US District Court for the Southern District of TX issued an order to temporarily enjoin the 2023 final rule pending the Supreme Court’s ruling in Community Financial Services Association of America v. CFPB. The court’s order stayed all deadlines for compliance with the requirements of the 2023 final rule. On May 16, 2024, the Supreme Court reversed the Fifth Circuit’s ruling in CFSA.

The CFPB issued the interim final rule to extend the compliance dates set forth in the 2023 final rule and making conforming adjustments. The compliance dates are being extended 290 days to compensate for the period the rule stayed (July 31, 2023 to May 16, 2024).

The rule divided institutions into three categories and assigned compliance dates according to those tiers. Origination requirements for the tiers are as follows:

Tier 1 institutions are those that originated at least 2500 covered transactions in both calendar years 2022 and 2023.
Tier 2 institutions are those that originated at least 500 covered transactions in both calendar years 2022 and 2023.
Tier 3 institutions are those that originated at least 100 covered transactions in both calendar years 2022 and 2023.

Additionally, the final rule permits financial institutions to use its originations of covered credit transactions in each of calendar years 2023 and 2024, rather than those in 2022 and 2023 to determine its compliance date.

Compliance and Data Submission Dates:

Tier 1 institutions now have a compliance date of July 18, 2025. Tier 2 institutions now have a compliance date of January 16, 2026 and Tier 3 institutions now have a compliance date of October 18, 2026.
Tier 1 institutions will make their first data submission by June 1, 2026; Tier 2 and Tier 3 by June 1, 2027.

U.S. Department of Treasury Request for Information on Uses, Opportunities, and Risks of Artificial Intelligence in the Financial Services Sector

NASCUS Legislative and Regulatory Affairs Department
July 1, 2024

The U.S. Department of Treasury has issued a request for information (RFI) seeking comment on the uses, opportunities, and risks presented by developments and applications of artificial intelligence (AI) within the financial sector.

With this RFI, Treasury acknowledges it is working to catch up with the use of AI in this sector and must quickly learn more about AI and how the financial services industry is utilizing it. The RFI covers a wide range of issues, including anti-money laundering (AML) and anti-fraud compliance, fair lending, and consumer protection concerns – with a heavy focus on those protections concerning bias.

Comments are due on the RFI by August 12, 2024.

Summary

Background: Treasury’s previous work surrounding AI

The RFI summarizes Treasury’s previous engagement with stakeholders in developing an understanding of the developments and application of AI within the financial services space. Previous work includes:

November 2022 report, Assessing the Impact of New Entrant Non-bank firms on Competition in Consumer Finance Markets. This report found many non-bank firms were using AI to expand their capabilities and service offerings, creating new data privacy and surveillance risks. The report also identified concerns related to bias and discrimination in the use of AI in financial services including “challenges and explainability” – the ability to understand a model’s output and decisions, or how the model establishes relationships based on the model input – and ensuring compliance with fair lending requirements.
December 2023 RFI soliciting input on developing a financial inclusion strategy. The strategy included questions related to the use of AI in the provision of consumer financial services and financial inclusion.
March 2024 report on AI and cybersecurity, which identified opportunities and challenges that AI presents to the security and resiliency of the financial services sector. This report also outlines next steps to address AI-related operational risk, cybersecurity, and fraud challenges.
2024 National Strategy for Combating Terrorist and Other Illicit Financing, which found that “innovations in AI, including machine learning and large language models such as generative AI, have significant potential to strengthen anti-money laundering/countering the financing of terrorism (AML/CFT) compliance by helping financial institutions analyze large amounts of data and more effectively identify illicit finance patterns, risks, trends, and typologies.”
December 2018 Joint Statement on Innovative Efforts to Combat Money Laundering and Terrorist Financing issued by FinCEN and the federal banking agencies, “which encouraged banks to use existing tools or adopt new technologies, including AI, to identify and report money laundering, terrorist financing, and other illicit financial activity.”

The RFI also refers to FinCEN’s discussions through Exchange events and the Bank Secrecy Act Advisory Group (BSAAG) surrounding AI and its use for detecting illicit financial activity and observes that Section 6209 of the AML Act of 2020 requires Treasury to issue a rule specifying standards for testing technology and related internal processes designed to facilitate effective compliance with the BSA by financial institutions. We are still awaiting rulemaking under Section 6209.

Current Request for Information

“Financial Institution” for purposes of this RFI includes not just traditional FIs covered by the Bank Secrecy Act (BSA), but also fintech, and “any other company that facilitates or provides financial products or services under the regulatory authority of the federal regulators and state financial or securities regulators.”

The RFI utilized the definition of AI outlined in 15 U.S.C. §9401(3):

[A] machine-based system that can, for a given set of human-defined objectives, make predictions, recommendations or decisions influencing real or virtual environments. Artificial intelligence systems use machine and human-based inputs to perceive real and virtual environments; abstract such perceptions into models through analysis in an automated manner; and use model inference to formulate options for information or action.

With this RFI, Treasury seeks to identify what types of AI models and tools FIs are currently using. Treasury is specifically interested in gaining insights into the use of AI by FIs including but not limited to the following areas:

Provision of products and services – how FIs are using AI to assist in decisions related to offering financial products and services;
Risk management – how FIs are using AI or what are the potential uses of AI for managing risk including credit risk, market risk, operational, fraud, cyber, compliance, and reputation risk, as well as interest rate, liquidity, model risk, legal risk, and even asset-liability management;
Capital markets – how are FIs using AI to assist in capital markets activities, investments, etc.;
Internal operations – how FIs use AI to manage internal operations, payroll, training, software development;
Customer service – how FIs use AI in customer management, including complaint handling;
Regulatory compliance – how FIs are using AI to manage regulatory requirements, BSA/AML requirements for example;
Marketing – how are FIs using AI to market to individuals, groups, etc.

Questions:

The RFI consists of 19 questions broken into three categories with a series of subcategories surrounding four specific topics related to AI in financial institutions. The four topics are potential opportunities and risks; explainability and bias; consumer protection and data privacy; and third-party risk management.

General Use of AI in Financial Services
Under this category, Treasury is interested in how FIs are using or exploring the use of AI in financial services as discussed above. Treasury looks to understand the types of AI being used, specifically any developments made to existing AI and emerging AI technologies, and how they are developed and deployed by financial institutions. Finally, Treasury is interested in gaining insights into the general accessibility of AI.
Actual and Potential Opportunities and Risks Related to Use of AI in Financial Services
This section consists of 12 questions specific to opportunities and risks related to the use of AI in financial services. The 12 questions are separated into a series of subcategories seeking feedback surrounding:
1. Actual and Potential Opportunities and Benefits of AI in Financial Services
2. Actual and Potential Risks and Risk Management Oversight of AI – Explainability and Bias
3. Fair Lending, Data Privacy, Fraud, Illicit Finance, and Insurance; and
4. Third-Party Risks
Further Actions
Under this final category, Treasury asks 2 additional questions seeking to identify what actions are necessary to promote responsible innovation and competition concerning the use of AI in financial services and to what extent differences in jurisdictional approaches inside and outside the United States pose concerns for management of AI-related risks.

NASCUS Summary re: CFPB Request for Information Regarding Fees Imposed in Residential Mortgage Transactions
CFPB-2024-0021

The Consumer Financial Protection Bureau issued a Request for Information (RFI) seeking comment from the public related to fees charged by providers of mortgages and related settlement services.

Comments are due by August 2, 2024.

Summary

The Bureau notes that mortgages come with associated fees and costs, referred to as “closing costs,” that can significantly impact the costs of a home purchase. According to the Bureau, closing costs have risen sharply with the median total loan costs increasing over 36% on home purchase loans between 2021 and 2023.

These increased costs, along with increased home prices and interest rates, have placed increased pressure on borrowers’ budgets, contributing to a lack of access to credit and decreased home affordability. The Bureau also noted that lenders are also impacted by rising closing costs such as increased costs related to credit scores, credit report and employment verification.

The RFI looks at the impact of several loan costs related to “required services” such as origination fees and fees related to settlement services.

Comments Requested:

The Bureau is seeking input from the public on the impact closing costs have on borrowers and the mortgage market, including the degree to which they add overall costs or otherwise cause borrower harm. The Bureau is interested in hearing from consumers, industry participants, social services organizations, small business owners, consumer rights and advocacy organizations, legal aid attorneys, academics and researchers, and State and local governments.

The Bureau welcomes stakeholders to submit stories, data and information about mortgage closing costs. The Bureau has issued the following questions. However, they are interested in any comments submitted related to mortgage closing costs.

Are there particular fees that are concerning or cause hardships for consumers?
Are there any fees charged that are not or should not be necessary to close the loan?
Provide data or evidence on the degree to which consumers compare closing costs across lenders
Provide data or evidence on the degree to which consumers shop for closing costs across settlement providers
How are fees currently set? Who profits from the various fees? Who benefits from the service provided? What leverage or oversight do lenders have over third-party costs that are passed onto the consumer?
Which closing costs have increased the most over the past several years? What is the cause of such increases? Do they differ for purchase or refinance? Please provide data to support if possible.
What is driving the recent price increases of credit reports and credit scores? How are different parts of the credit report chain (credit score provider, national credit reporting agencies, reseller) contributing to this increase in costs? What competitive forces are or can be brought to bear on these costs? What are the impacts on consumers of the increased costs?
Would lenders be more effective at negotiating closing costs than consumers? Are there reports or evidence that are relevant to the topic?
What studies or data are available to measure the potential impact closing costs may have on overall costs, housing affordability, access to homeownership or home equity?

Decennial Notice of Regulatory Review and Request for Comment
NCUA: “Applications and Reporting” and “Powers and Activities”

NASCUS Legislative and Regulatory Affairs Department
June 24, 2024

On May 23, 2024, the NCUA Board approved a voluntary regulatory review and request for comment. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) requires the FFIEC and federal bank regulatory agencies to review their regulations every 10 years to identify any outdated, unnecessary, or unduly burdensome regulations applicable to insured depository institutions. While this statute does not apply to the NCUA, the agency is voluntarily participating in this review process.

Over the next two years, the NCUA will publish four Federal Register notices each requesting comment on multiple categories or regulations. This first notice requests comments on regulations concerning “Applications and Reporting” and “Powers and Activities.”

Comments on the voluntary regulatory review are due on or before August 21, 2024.

Summary

Due to the unique circumstances of federally insured credit unions and their members, the NCUA Board is issuing a separate request from the other agencies, including issues unique to credit unions. In previous decennial reviews, the Board developed and published for comment 10 categories of the NCUA’s regulations. The Board is following the previous reviews and is utilizing the same 10 categories in this multi-year review. The categories are:

Agency Programs;
Applications and Reporting;
Capital;
Consumer Protection;
Corporate Credit Unions;
Directors, Officers and Employees;
Anti-Money Laundering and Bank Secrecy Act;
Powers and Activities;
Rules of Procedure; and
Safety and Soundness

The first of four requests for comment NCUA is publishing addresses the following categories of NCUA’s regulations:

Applications and Reporting; and
Powers and Activities

These two categories include the following regulations for which NCUA is seeking comment:

[kp_table]

CATEGORY OF REGULATION	SUBJECT	REGULATION CITE	APPLIES TO FISCUS
1. APPLICATIONS AND REPORTING
	Change in official or senior executive officer in credit unions that are newly chartered or in troubled condition	12 CFR 701.14	Yes, by reference in §741.205
	Federal credit union chartering, field of membership modifications, and conversions	12 CFR 701.1; Appendix B to Part 701	FCUs only
	Federal credit union bylaws	12 CFR 701.2; Appendix A to Part 701	FCUs only
	Fees paid by Federal credit unions	12 CFR 701.6	FCUs only
	Bank Conversions and Mergers	12 CFR 708a	FCUs only
	Mergers of Insured Credit Unions into Other Credit Unions; Voluntary Termination or Conversion of Insured Status	12 CFR 708b	Yes, by reference in §741.208
	Applications for insurance	12 CFR 741.0; 741.3; 741.4
	Financial, statistical, and other reports	12 CFR 741.6	Yes
	Conversion to a State-chartered credit union	12 CFR 741.7	Yes
	Purchase of assets and assumption of liabilities	12 CFR 741.8	Yes
2. POWERS AND ACTIVITIES
2a. Lending, Leasing, and Borrowing
	Loans to members and lines of credit to members Loan participations	12 CFR 701.21; 12 CFR 701.22	Yes, by reference in §741.225 (Loan participations)
	Purchase, sale, and pledge of eligible obligations	12 CFR 701.23	FCUs only
	Borrowed funds	12 CFR 701.38	FCUs only
	Statutory lien	12 CFR 701.39	FCUs only
	Leasing	12 CFR 714	FCUs only
	Member Business Loans; Commercial Lending	12 CFR 723	Yes, by reference in §741.203
	Maximum borrowing	12 CFR 741.2	Yes
2b. Investments and Deposits
	General Investment and Deposit Activities Derivatives	12 CFR 703 Subpart A; 12 CFR 703 Subpart B	Yes, by reference in §741.219
	Loans to credit unions (subordinated debt)	12 CFR 701.25	Yes, by reference in §741.227
	Federal credit union occupancy and disposal of acquired and abandoned premises	12 CFR 701.36	FCUs only
	Credit Union Service Organizations (CUSOs)	12 CFR 712	Yes, by reference in §741.222
	Payment on shares by public units and nonmembers	12 CFR 701.32	Yes, by reference in §741.204
	Designation of low-income status	12 CFR 701.34	Yes, by reference in §741.204
	Share, share draft, and share certificate accounts	12 CFR 701.35	FCUs only
	Treasury tax and loan depositories; depositories and financial agents of the Government	12 CFR 701.37	FCUs only
	Refund of interest	12 CFR 701.24	FCUs only
	Trustees and Custodians of Certain Tax-Advantaged Savings Plans	12 CFR 724	FCUs only
2c. Miscellaneous Activities
	Incidental Powers Charitable contributions and donations; charitable donation accounts	12 CFR 721.12; 12 CFR 721.3(b)	FCUs only
	Credit union service contracts	12 CFR 701.26	FCUs only
	Services for nonmembers within the field of membership	12 CFR 701.30	FCUs only
	Suretyship and guaranty	12 CFR 701.20	Yes, by reference in §741.221
	Foreign branching	12 CFR 741.11	Yes

[/kp_table]

NASCUS Summary re: CFPB Request for Information Regarding Fees Imposed in Residential Mortgage Transactions
CFPB-2024-0021

The Consumer Financial Protection Bureau issued a Request for Information (RFI) seeking comment from the public related to fees charged by providers of mortgages and related settlement services.

Comments are due by August 2, 2024. The RFI can be accessed here.

Summary

The RFI looks at the impact of several loan costs related to “required services” such as origination fees and fees related to settlement services.

Comments Requested:

Are there particular fees that are concerning or cause hardships for consumers?
Are there any fees charged that are not or should not be necessary to close the loan?
Provide data or evidence on the degree to which consumers compare closing costs across lenders
Provide data or evidence on the degree to which consumers shop for closing costs across settlement providers
How are fees currently set? Who profits from the various fees? Who benefits from the service provided? What leverage or oversight do lenders have over third-party costs that are passed onto the consumer?
Which closing costs have increased the most over the past several years? What is the cause of such increases? Do they differ for purchase or refinance? Please provide data to support if possible.
What is driving the recent price increases of credit reports and credit scores? How are different parts of the credit report chain (credit score provider, national credit reporting agencies, reseller) contributing to this increase in costs? What competitive forces are or can be brought to bear on these costs? What are the impacts on consumers of the increased costs?
Would lenders be more effective at negotiating closing costs than consumers? Are there reports or evidence that are relevant to the topic?
What studies or data are available to measure the potential impact closing costs may have on overall costs, housing affordability, access to homeownership or home equity?

NASCUS Summary re: CFPB Interpretive Rule on Application of Regulation Z to Digital User Accounts that Access Buy Now, Pay Later Loans

12 CFR Part 1026

The Consumer Financial Protection Bureau (CFPB) issued an interpretative rule to address the applicability of subpart B of Regulation Z to lenders that issue digital user accounts to access credit, including those lenders that market loans as “Buy Now, Pay Later.”

The rule is applicable as of July 30, 2024. The Bureau is taking comments on the rule until August 1, 2024.
The rule can be found here.

Summary:

The CFPB’s interpretative rule describes how these lenders meet the criteria for being “card issuers” for purposes of Regulation Z. Lenders that extend credit are also “creditors” subject to subpart B of Regulation Z, including those provisions governing periodic statements and billing disputes. The Bureau published this rule to clarify existing obligations for market participants with specific business practices.

Definitions

Buy Now, Pay Later (BNPL) refers to a consumer loan for a retail transaction that is repaid in four (or fewer) interest-free installments and that does not impose a finance charge. The loan generally requires an initial down payment of 25 percent, followed by three additional installments due every two weeks.

Legal/Regulatory Analysis

Under the rule’s legal analysis, lenders that issue digital user accounts used by consumers (from time to time) to access credit products to purchase goods/services are “card issuers” under Regulation Z, including when those products are marketed as BNPL. Such digital user accounts are “credit cards” under Regulation Z. Traditional BNPL products are closed-end loans payable in four or fewer installments without a finance charge, used to make purchases on credit. As a result, the rule concludes that BNPL loans are subject to some, but not all, of Regulation Z’s credit card regulations. The rule goes on to say that digital user accounts that consumers use to access BNPL credit mimic conventional credit cards. They meet the regulatory definition of “credit cards” as defined in 12 CFR 1026.2. Lenders that issue such digital user accounts are “card issuers” under 12 CFR 1026.2(a)(7) and “creditors” for purposes of subpart B of Regulation Z. However, traditional BNPL products do not meet the definition of “open-end credit” as defined in 12 CFR 1026.2 or of a “credit card account under an open-end (non-home secured) consumer credit plan.”

As a result, lenders that issue digital user accounts to access BNPL credit are subject to regulations appearing in subpart B of Regulation Z, including provisions governing credit card dispute and refund rights. The Bureau notes that Section 1026.2 “specifically states that subpart B also applies to credit that is not open end if, as with BNPL, the credit is not subject to a finance charge and is not payable by written agreement in more than four installments.” Further, the Bureau states that “Congress expressly instructed the Bureau to apply open-end credit regulations to this form of credit that is not open end.” In addition, the rule notes that the Bureau is required by the Truth in Lending Act (TILA)to apply open-end credit requirements to card issuers that extend credit with no finance charge that is payable in four or fewer installments, to the extent appropriate, even though the requirements of the open-end credit provisions are by their terms applicable only to creditors offering open-end credit plans.

The CFPB affirms via this interpretative rule that BNPL lenders that extend credit – even though that credit is not subject to a finance charge and is not payable by written agreement in more than four installments—are creditors subject to subpart B of Regulation Z, including those provisions governing costs of credit disclosures and billing disputes.

Summary on Interagency Guidance on Reconsiderations of Value for Residential Real Estate Valuations