NCUA Proposed Rule BSA Part 748

Summary: NCUA Proposed Rule BSA Part 748

Prepared by NASCUS Legislative & Regulatory Affairs Department
January 2021

NCUA is proposing to provide, on a case-by-case basis, exemptions from SAR filing requirements to federally insured credit unions (FICUs) that develop innovative solutions to meet their BSA/AML compliance obligations.

The proposed rule may be read here. Comments are due to NCUA (30 days from publication).  

Summary

Since 1985, NCUA’s rules have required FICUs to report potential violations of law arising from transactions through the institution. In 1992, Congress made the reporting of possible criminal violations part of the BSA. In 1996 FinCEN issued its SAR reporting regulations and NCUA then amended its regulations to incorporate FinCEN’s regulations into NCUA’s rules. NCUA and FinCEN’s regulations are substantially similar but not identical. FICUs must comply with both regulations.

Both the NCUA and FinCEN require FICUs file SARs relating to money laundering and transactions that are designed to evade the reporting requirements of the BSA and to maintain the confidentiality of those filings. Both regulations also provide:

  • that SARs are not required for a robbery or burglary committed or attempted that is reported to appropriate law enforcement authorities
  • recordkeeping requirements for SARs and supporting documentation
  • that supporting documentation shall be deemed to have been filed with the SAR
  • that supporting documentation shall be made available to appropriate law enforcement agencies upon request
  • a safe harbor from liability to any FICU and any of its officials, employees, or agents that make a voluntary disclosure of any possible violation of law or regulation to a government agency or file a SAR pursuant to the regulations

However, the NCUA’s regulations cover a broader range of transactions (e.g., insider abuse at any dollar amount) and require FICUs promptly notify their board of directors when a SAR has been filed.

Innovation in Compliance and Regulatory Flexibility

In 2018, the NCUA, FinCEN, and the other federal banking agencies issued a statement encouraging financial institutions to take innovative approaches to meet their BSA/anti-money laundering (BSA/AML) compliance obligations. Types of innovative approaches that have developed include:

  • automated form population using natural language processing, transaction data, and customer due diligence information
  • automated or limited investigation processes depending on the complexity and risk of a particular transaction and appropriate safeguards
  • enhanced monitoring processes using more and better data, optical scanning, artificial intelligence, or machine learning capabilities.

Industry has requested exemptive relief to explore innovation related to issues such as:

  • SAR investigation & timing
  • SAR disclosures and sharing
  • Ongoing activity and related continued SAR filings
  • Outsourcing SAR production
  • The role of credit unions’ agents
  • Using shared facilities, utilities, and data & use & sharing of “de-identified” data

Proposed Rule

The proposal would add a provision to § 748.1 allowing NCUA to exempt a FICU from the requirements of that section. Exemptions may be:

  • conditional or unconditional
  • apply to particular persons, or to classes of persons
  • apply to transactions or classes of transactions

When evaluating exemption requests, NCUA will determine whether the exemption is consistent with the purposes of the BSA (seeking FinCEN’s determination as well), with safe & sound practices, & may consider other factors as appropriate. In addition, NCUA:

  • will seek FinCEN’s concurrence regarding any exemption requests that involve the filing of SARs required by FinCEN’s rules
  • may consult with the other state and federal banking agencies
  • may grant an exemption for a specified time period
  • may revoke previously granted exemptions if circumstances change

Although NCUA will have obtained FinCEN’s concurrence, the FICU will still need an exemption from FinCEN as well for FinCEN’s SAR rules. NCUA exemptions would not relieve a FICU from the obligation to comply with FinCEN’s SAR regulation.

NCUA will grant exemptions to its stand-alone BSA related requirements.

Final Rule Summary: Role of Supervisory Guidance (Part 791, Subpart D)

Prepared by NASCUS Legislative & Regulatory Affairs Department
February 2021

NCUA has finalized a rule codifying the Interagency Statement Clarifying the Role of Supervisory Guidance issued by the federal agencies (FAs) in September 2018 that reiterates the federal banking agencies’ commitment to the principle that supervisory guidance does not carry the full force and effect of law and does not create binding obligations for financial institutions.

NCUA issues the final rule in conjunction with the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve (the Board), the Office of Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (Bureau) finalizing a similar rule for their regulated entities.

By incorporating the 2018 Statement into Part 791 Subpart D, NCUA codifies the principles of the Statement and makes them binding upon the agency and NCUA examiners. The new rule applies to NCUA interactions with FISCUs but is not binding on state examiners.

The provisions of this rule become effective March 5, 2021.

Summary

The 2018 Statement is now codified in Part 791 Subpart D of NCUA’s Rules and Regulations. The rule binds NCUA to the principles of the 2018 Statement as revised by the 2020 proposal. NCUA will not treat covered guidance as binding rules, and will:

  • limit the use of numerical thresholds in guidance;
  • reduce the issuance of multiple supervisory guidance on the same topic;
  • make the role of supervisory guidance clear to examiners & credit unions; and
  • encourage credit unions to discuss their concerns about supervisory guidance with their agency contact.
Interim Final Rule Summary: Central Liquidity Facility (Part 725)

Prepared by NASCUS Legislative & Regulatory Affairs Department
March 2021

NCUA issued an Interim Final Rule (IFR) extending enhancements to the Central Liquidity Facility (CLF) first enacted in 2020 in response to the pandemic.

The Interim Final Rule may be read here. Comments are due to May 24, 2021. The rule took effect on March 24, 2021.

Summary

The Cares Act, passed in response to the COVID 19 pandemic, made several changes to the CLF to enhance credit union liquidity options during the crisis. As a result, NCUA approved an IFR (April 16, 2020) to implement those changes and make other enhancements to the CLF. The changes related to the CARES Act were scheduled to sunset on December 31, 2020. However, the Consolidated Appropriations Act (CAA) extended the sunset date of the CLF enhancements in the CARES Act to December 31, 2021. NCUA is now cohering its regulations to the CAA extension.

  1. The CARES Act temporarily amended the definition of “Liquidity need” by removing the words “primarily serving natural persons.” This allowed corporate credit unions to access the CLF for their own liquidity needs. This change was to sunset on December 31, 2020. The CAA extended this provision in the CARES Act until December 31, 2021.
    This IFR makes a corresponding change to § 725.2(i).
  2. The CARES gave NCUA discretion to amend the Agent membership requirement that a corporate credit union subscribe to CLF capital stock on behalf of all of the corporate’s natural person credit union members regardless of whether all of those members want access to the CLF. In response, NCUA allowed corporates to only subscribe to stock on behalf of those natural person credit union members seeking access to the facility.
    This provision was scheduled to sunset in accordance with the CARES Act on December 31, 2020 but was extended to December 31, 2021 by the CAA. Therefore, the IFR now amends § 725.4(ii) to reflect that change. Furthermore, after December 31, 2021, corporates now have until January 1, 2023 to either:

    • Purchase Facility stock for all of its member credit unions; or
    • Terminate its membership in the Facility
  3. As noted above, the CARES Act allows CLF Agents to borrow for their own liquidity needs. To implement authorized Agent borrowing, the April 2020 NCUA Interim Final Rule amended § 725.4 to clarify that an Agent member borrowing from the CLF for its own liquidity needs must first subscribe to the capital stock of the Facility in an amount equal to ½% of its own paid-in and unimpaired capital and surplus. The new sunset date of these provisions is December 31, 2021.
    This IFR reaffirms that upon the December 31, 2021 sunset of this provision, an agent:

    • May not request any additional CLF advances for its own liquidity needs; and
    • Must continue to follow the terms of the CLF advance agreement
  4. In the April 2020 Interim Final Rule, the Board amended the waiting period for a credit union to terminate its membership in the CLF until January 1, 2022. These changes temporarily permitted a credit union to withdraw from membership in the CLF after notifying the NCUA Board in writing on the sooner of:
    • Six months from the date of its written notice to the NCUA Board; or
    • December 31, 2020. Further, any credit union that remained a member after December 31, 2020, was permitted to withdraw from membership immediately upon notifying the Board in writing of its intent to do so.

NCUA is now making several conforming amendments to this section to address the extension of the CLF provisions in the CARES Act by the CAA.

  • Any credit union that joined the CLF between April 29, 2020 and December 31, 2022 may immediately withdraw from membership upon notifying the Board in writing of its intent to do so.
  • Credit unions that join the CLF between January 1, 2021 and December 31, 2021, regardless of percentage amount of stock subscription, may withdraw from membership in the Facility after notifying the NCUA Board in writing on the sooner of:
  • 6 months from the date of its written notice to the NCUA Board; or
  • December 31, 2021.

Any credit union that joins the CLF between January 1, 2021 and December 31, 2021, and remains a member after December 31, 2021, may immediately withdraw from membership upon notifying the Board in writing of its intent to do so until December 31, 2022. On January 1, 2023, the immediate withdrawal period will cease, and all members will be subject to the termination provisions in effect before April 29, 2020.

CARES Act provisions extended by the CAA but not included in the IFR

The CARES Act included two additional amendments to the FCU Act that were also extended by the CAA but are not included in the IFR because they did not require NCUA rulemaking to implement. However, both provisions are extended until December 31, 2021. The 2 additional provisions of the CARES Act:

  1. Increased the multiplier from “12x” to “16x;” and
  2. Provided more clarity about the purposes for which the NCUA Board can approve liquidity-need requests by removing the phrase “the Board shall not approve an application for credit the intent of which is to expand credit union portfolios.”
Letter to Credit Unions 24-CU-01: NCUA’s 2024 Supervisory Priorities

NASCUS Legislative and Regulatory Affairs Department
January 24, 2024

On January 22, 2024, the NCUA issued Letter to Credit Unions 24-CU-01 outlining the agency’s Supervisory Priorities for 2024. According to the letter, NCUA is focusing on areas they perceive to be the “highest risk” to credit union members, the credit union industry, and the National Credit Union Share Insurance Fund (NCUSIF).

The NCUA highlights challenges that arose in 2023 resulting in a strain on credit union balance sheets. The rise in interest rate and liquidity risks resulted in an increase in credit unions with composite CAMELS ratings of 3, 4, and 5.

Similar to 2023, NCUA states it will utilize a combination of onsite and offsite examination and supervision activities, as appropriate. The agency will also continue its exam flexibility initiative, providing an extended examination cycle for certain credit unions. The following represent NCUA’s primary areas of supervisory focus for 2024.

Summary

Credit Risk

Not unexpectedly, credit risk remains a supervisory priority for 2024. Due to economic pressures on borrowers with high inflation, high interest rates, and borrowing costs, among other factors, NCUA examiners will review the following:

  • Existing lending programs’ soundness and credit union risk management practices including:
    • Any adjustments a credit union made to loan underwriting standards;
    • Portfolio monitoring practices;
    • Modification and workout strategies for borrowers facing financial hardships; and
    • Collection programs
  • All factors in evaluating a credit union’s efforts to provide relief for borrowers, including whether the efforts were reasonable and conducted with proper controls and management oversight.
  • Policies and procedures related to the Allowance for Credit Losses (ACL);
    • Documentation of ACL reserve methodology;
    • The adequacy of ACL reserves; and
    • Adherence to Generally Accepted Accounting Principles (GAAP)

Liquidity Risk

Due to increased uncertainty in interest rate levels and economic conditions, liquidity risk remains a supervisory priority of the NCUA. Because of these concerns, NCUA examiners will continue to assess liquidity management by evaluating:

  • The effects of changing interest rates on the market value of assets and borrowing capacity.
  • Scenario analysis for liquidity risk modeling, including possible member share migrations (e.g., shifts from core deposits into more rate-sensitive accounts).
  • Scenario analysis for changes in cash flow projection for an appropriate range of relevant factors (e.g., changing repayment speeds).
  • The cost of various funding alternatives and their impact on earnings and capital.
  • The diversity of funding sources under normal and stressed conditions.
  • The appropriateness of contingency funding plans to address any plausible unexpected liquidity shortfalls.

Consumer Financial Protection

Consumer financial protection also remains a key focus as NCUA will assess federal credit unions’ compliance with applicable consumer financial protection laws and regulations. NCUA indicates that the agency considers trends in violations identified through examinations and member complaints, emerging issues, and any recent changes to regulatory requirements.

Key areas of focus for examiners in 2024 will be:

  • Overdraft programs;
    • Including an expanded review of website advertising, balance calculation methods, and settlement processes.
    • Adjustments made to overdraft programs to address consumer compliance risk and potential consumer harm from unexpected overdraft fees.
  • Fair lending;
    • Policies and practices for redlining, marketing, and pricing discrimination risk factors.
  • Auto lending, including review of indirect auto loans.
    • Disclosures, policies, and practices to assess compliance with the Truth in Lending Act.
    • Policies regarding GAP insurance
  • Flood Insurance
    • Policies and procedures

Information Security (Cybersecurity)

Because the cybersecurity threat landscape poses persistent risks to credit unions NCUA continues to prioritize this area and will assess:

  • Whether credit unions have implemented robust information security programs to safeguard both members and the credit unions.

Examiners will continue to utilize the information security examination procedures as well.

The NCUA also reminds credit unions of the steps to consider when implementing the agency’s Cyber Incident Notification Rule and requirements. The NCUA also advises credit unions to maintain a high level of vigilance and continually enhance their ability to respond to cybersecurity threats and encourages credit unions to conduct voluntary cybersecurity self-assessments using the NCUA’s Automated Cybersecurity Evaluation Toolbox (ACET). The NCUA also provides a dedicated website to its cybersecurity resources for credit unions.

Interest Rate Risk

NCUA examiners will evaluate the “S” CAMELS component by reviewing a credit union’s Interest Rate Risk program for the following risk management and control activities:

  • Key assumptions and related data sets are reasonable and well documented:
  • Back testing and sensitivity testing of the assumption set.
  • The credit union’s overall level of IRR exposure is properly measured and controlled.
  • Results are communicated to decision-makers and the board of directors.
  • Proactive action is taken to remain within safe and sound policy limits.

Other Updates 

Bank Secrecy Act (BSA) Compliance 

The NCUA has added Bank Secrecy Act compliance to the agency’s supervisory priorities as an area of supervisory interest for 2024. This was absent from the 2023 priorities. The NCUA notes that a credit union’s failure to comply with BSA requirements can pose a significant risk to the credit union, its members, and the SIF. The agency indicates it will provide updates to credit unions regarding any regulatory changes to the BSA throughout 2024, as well as updates to supervisory expectations and examination procedures.

Due to the Anti-Money Laundering (AML) Act of 2020 and associated rulemaking, it is anticipated the NCUA will issue guidance and additional resources to credit unions.

Support for Small Credit Unions and Minority Depository Institutions

The NCUA will also continue its focus on supporting and preserving small credit unions and minority depository institutions (MDIs) through the Small Credit Union and MDI Support Program. The NCUA states the benefits of these programs are expected to include:

  • Expanded opportunities for qualifying credit unions to receive support through NCUA grants, training, and other initiatives;
  • Furthered partnerships with organizations and industry mentors that can support small credit unions and MDIs; and
  • Added support to credit union management in addressing operational challenges.

The NCUA also indicates the agency plans to enhance its MDI-specific examiner resources by outlining procedures designed specifically to guide examiners in the supervision of MDIs.

Final Revised CDFI Certification Application
U.S. Department of Treasury

NASCUS Legislative and Regulatory Affairs Department
December 26, 2023

On December 7, 2023, the Community Development Financial Institution (CDFI) Fund released the long-awaited revised Certification Application. For NEW CDFI applications, the application portal will be open on December 20, 2023. Existing CDFI’s must reapply for certification using the revised application beginning August 1, 2024, and NO LATER than 11:59 pm ET on December 20, 2024.

The new application includes several changes based on comments received during the numerous public comment periods.

Summary of Key Updates

Preamble and Basic Applicant Information

Process for changing certification-related lists and standards

The CDFI Fund (Fund) has established a method for applicants to request CDFI Fund approval of additions/changes to certain key lists and standards related to certification, including:

  • Financial Products and Services;
  • Disregarded or included assets and staff time;
  • Targeted Populations;
  • Target Market assessment methodologies; and
  • Responsible financing standards.

Allowing for ongoing changes will provide greater flexibility in administering certification applications. The Fund will publish updated lists and standards as well as related guidance when changes are made.

Loan Purpose Tables and Product Pricing Data

The initial drafts of the application included tables seeking specific information surrounding “financial products information” and “financial services information (loan purposes table) and would have required applicants to enter information about their loan products.  To reduce burden on applicants, the final application does not include those “loan purpose tables.” Instead, a limited amount of data will be collected under a set of questions in the Revised Application and in the Transaction Level Report. The Transaction Level Report will capture certain product pricing data, such as interest rates.

Primary Mission

Documenting Mission and Strategy

If an applicant does not have a strategic plan, the revised application provides that an applicant may submit, in the absence of a strategic plan, a board or owner-approved narrative. The narrative must describe the community development outcomes that the applicant believes will result from its financing activities and describe how those activities will lead to the outcomes.

Responsible Financing Standards

The revised application collects information on an applicant’s financing practices ensuring those practices are consistent with a community development mission. This section of the application now begins with an informational narrative which identifies practices that the Fund considers to be consistent with promoting community development:

  • Not harm consumers;
  • Be affordable and originated based on a borrower’s ability to repay; and
  • Have terms and conditions that are transparent and understandable to the borrower.

The narrative also specifies safety, affordability, and transparency of an applicant’s financial services are an important commitment to the community development mission, and collection practices should comply with federal, state, and local law.

The revised application also asks about practices that the Fund may view as inconsistent with promoting a community development mission that will result in a denial for certification and a list that includes, but is not limited to, the following:

  • Originating or offering loans that exceed the interest limits that apply to non-depository institutions in the borrower’s state;
  • Offering single-family, owner-occupied, residential mortgage loan products secured by a non-subordinate lien that:
    • Fails to verify the income or assets of the borrower;
    • Includes negative amortization;
    • Includes interest-only payments;
    • Charges upfront points and fees above 3%
    • Is underwritten at less than the maximum rate in the first five years.
  • Offering consumer loans exceeding the Military Lending Act APR cap of 36%
  • Selling charged-off consumer or small business debt to debt buyers;
  • Having a current CRA rating below Satisfactory;

The revised application also includes criteria and questions about certain practices requiring an applicant to explain how the practice promotes community development. Practices that will require additional explanation include:

  • Failing to evaluate the borrower’s ability to repay a loan;
  • Offering small business loans that allow for an APR in excess of 36%
  • Offering single-family, owner-occupied, residential mortgage loan products secured in 1st lien position with balloon payments or that carry an original maximum term longer than 30 years (unless offered through a government program);
  • Charging overdraft fees that exceed the amount of the item cleared, or charging such fees on more than six occasions in 12 months; and
  • Charging NSF fees that exceed the amount of the item returned unpaid.

Considerations Related to Specific Products and Services

Mortgage Lending

The revised application clarifies that while the application may rely on concepts in the CFPB’s ATR/QM rule, the CDFI Fund does not require CDFIs to conform to the ATR/QM underwriting standards.

The revised application clarifies that questions about mortgage products ONLY apply to consumer credit transactions that are secured by a lien on a single-family, owner-occupant residence.

For mortgage loans exceeding 30 years that are not originated as part of a federal government program, lenders seeking CDFI certification will need to explain how their product promotes community development.  Mortgage loans with a balloon payment are no longer automatically disqualified, but applicants will need to explain how this product promotes community development.

Consumer Lending

The revised application clarifies that CDFIs are not required to calculate and report Military Annual Percentage Rate (MAPR) on their consumer loans. Instead, an applicant must attest whether any of its consumer loan products “allow for” an MAPR of more than 36%.[1] If a certified CDFI determines that a previous transaction’s MAPR exceeds 36%, the CDFI will be able to remain eligible for CDFI certification if it takes appropriate action: specifically, making any necessary rate correction and repaying any interest or fees that caused the MAPR of the loan to exceed 36% within 210 days of loan consummation.

Overdraft Products and Non-Sufficient Funds Fees

The revised application now requires applicants to explain NSF and overdraft fees that exceed the amount of the item being cleared or returned unpaid, any NSF fees that are charged more than once for the same transaction, and any overdraft fees that may be charged more than six times in 12 months.

Financing Entity

When determining an applicant’s predominance test, as it applies to staff time dedicated to development services, the Fund will disregard staff time dedicated to development services so as not to skew the calculation.

Target Market

Except when using the flexibility described under “Financial Services Option,” to be certified as a CDFI, an Applicant must direct at least 60% of both the quantity and dollar volume of arm’s-length, on-balance sheet Financial Products to one or more eligible Target Markets. The revised application introduces new flexibility, whereas if a certified CDFI fails to meet the Target Market benchmark over its most recently completed fiscal year, under certain circumstances it may maintain its certification by demonstrating that it met the benchmark over the previous three-year period.

Removal of geographic boundaries on pre-qualified Investment Area

Under the revised application, applicants proposing to serve pre-qualified investment areas will not need to develop a map of their Target Market, as was previously required.

Customized Investment Areas (CIA) and non-Metro counties

The Fund’s regulations provide the option for Applicants to develop a customized geographic Investment Area, which allows them to combine contiguous geographic units that meet the criteria of economic distress (e.g., high poverty and/or low income) with other areas that do not, such that on average they would meet criteria of economic distress.  Similarly, Applicants may designate non-Metro counties as Investment Areas if they meet the criteria of economic distress as a whole.  However, a CDFI that claims a customized or county-wide Investment Area is not currently required to conduct most of its lending in the portions of the CIA or non-Metro county that meet the economic distress criteria.  As a result, such an entity can claim to meet the 60% Target Market threshold even if all of its financing activity is directed to areas that do not meet the economic distress criteria. This result can defeat the spirit and intent of the CDFI Fund. Therefore, Applicants claiming a CIA or non-Metro county Investment Area would be required to demonstrate that it directs at least 85% of its CIA or county financing activity within the qualified census tracts of that CIA or county.  The result of establishing this threshold would be that at least 51% (85% x 60% = 51%) of the total transactions of a certified CDFI utilizing only CIAs and/or non-Metro counties would be in census tracts that meet the 12 criteria of economic distress.  In comparison, entities serving only Pre-qualified Investment Areas must direct at least 60% of their total activity within qualified census tracts.

The CDFI Fund is adopting a transition period for this change for rural lenders.  Specifically, rural lenders that rely on a customized Investment Area will have three years after the publication date of the Revised Application to meet the new 85% standard for financing within the qualified tracts of a non-Metro CIA or county.  During these initial three years, rural lenders will be permitted to meet a lower threshold.  For those lenders, at least 75% of their non-Metro customized Investment Area and/or non-Metro county Investment Area financing must be in qualifying tracts to meet the overall 60% Target Market benchmark.  As a result, for three years after the publication of the Revised Application, an Applicant exclusively serving a non-Metro CIA or county Target Market could become certified with no less than 45% of its total financing activity within individually qualified census tracts.

New Other Targeted Populations (OTP)

The revised application reflects that the Fund has determined that persons with disabilities will be a newly approved OTP. Additionally, the Fund has determined there is significant evidence to support designating Filipino and Vietnamese populations as OTPs.

Structured Development Services

The revised application now defines “structured development services” as having a defined curriculum or written set of goals and objectives, and the outcome includes preparing current or potential members/customers to access or increase their knowledge about the CDFI’s financial products and services. This definition also clarifies that this may be demonstrated through a “written set of goals and objectives” and does not require a costly curriculum and provides for a method of delivery of the development services.

Development services to youth, such as financial education, may also be included as development services when an applicant is applying for CDFI certification. Development services may also be delivered online without an instructor if they meet certain standards.

Accountability

Accountability methods

To be a CDFI, an entity must maintain accountability to residents of the applicant’s identified investment areas or target populations, through representation by individuals on its governing board and/or Advisory Board. The Fund will continue to allow applicants that are regulated institutions to rely on an advisory board to demonstrate accountability but will require that at least a supermajority of its members be representatives of its target markets. As an additional requirement, at least one governing board member must ALSO sit on the advisory board to serve as a bridge to the decision-making process.

Increased Flexibility

The revised application enables applicants to choose multiple target markets or national investment areas and when assessing board membership percentages, CDFIs with multiple target markets will receive a “collective review” of the representatives of the different target market types. The review is cumulative and the applicant must present at least one representative for each target market. This amendment provides greater flexibility under the accountability standard.

Advisory Board and Advisory Board Policy Assessment

The revised application instructions provide greater clarity about the requirements for a CDFI advisory board. The application requests the following information:

  • The purpose of the advisory board;
  • How the advisory board’s input to the governing board is documented;
  • How advisory board members are selected and approved; and
  • How the advisory board seeks input form, or reviews data on the financial needs and opportunities in the target markets.

Employee Accountability Consideration

Applicants may now submit information on any staff member of a mission-driven organization that serves the applicant’s target market to be considered accountable if the meet the accountability criteria, rather than strictly executive staff.

Board Compensation

If an applicant compensates board members, the board members will not be prohibited from being considered accountable to a target market if they meet the accountability criteria.

Financial Interest – Active Financial Products

Board members will not be excluded from consideration of accountability to a target market if they hold an active financial product with the applicant (e.g., mortgage loan). However, the applicant will need to confirm that it has a policy that requires board members to recuse themselves from any decision that may involve their financial product.

Grace Period for Currently Certified CDFIs

Entities that are currently certified CDFIs as of December 20, 2023, will have until December 20, 2024, to reapply for certification. The window for recertification applications will open on August 1, 2024.

New CDFI applicants may begin submitting applications December 20, 2023.

[1] The MAPR, as noted, is applicable to all consumer loan products, not just loans granted to military members.

 NCUA Final 2024 Budget Summary

NASCUS Legislative and Regulatory Affairs Department
December 19, 2023

The NCUA Board approved a $394.5 million 2024 proposed budget[1] posted on October 26, 2023.  NASCUS provided a summary[2], and both written[3] and oral[4] testimony related to the issue.  On December 14, 2023, the NCUA Board unanimously passed[5] a modified budget of $385.7 million representing an $8.8 million decrease from the initial proposal.  The modifications made to the finalized budget are summarized here.

SUMMARY OF FINAL BUDGET APPROVED:

The funding levels recommended in the 2024 combined final budget were reduced by a net of $8.8 million, for a revised total of $385.7 million.  The revision reflects an offset of $24.5 million unspent prior-year budget surpluses, up $6.5 million from the staff draft budget.  The resulting recommended 2024 funding level is 7.0 percent higher than the Board-approved 2023 budget, down from the 9.5 percent increase originally proposed.  Staffing in 2024 would be reduced by one position from the original staff draft.

CHANGES FROM THE PROPOSED BUDGET:

Specific changes to the staff draft operating budget include:

  • An additional $5.3 million in expected surplus projected for 2023, for a total of $23.3 million in carryforward funding in the operating budget. This amount has been used to lower the overall level of new operating budget funding for 2024.
  • The budget for agency travel expenses reduced by $2 million, reflecting use of examination efforts conducted off-site by NCUA examiners, and other efficiencies.
  • One position requested for the Office of Ethics Counsel was eliminated.
  • The recommended final budget eliminates two new positions and related funding requested to establish a new Office of the Executive Secretary.
  • One new position was added to the Office of External Affairs and Communications to lead implementation of the 21st Century Integrated Digital Experience Act and other requirements newly established for Federal Government websites. The new writer-editor position proposed in the staff draft for the Office of External Affairs and Communications was eliminated.
  • Funding for one position in the Office of Human Resources that is authorized within the NCUA staffing plan but currently unfunded was moved from 2024 to 2025.
  • One new position was added to the Office of the Chief Information Officer to reflect information security management needs. The recommended final budget eliminates funding proposed in the staff draft for one position in the Office of the Chief Information Officer that is authorized within the NCUA staffing plan but currently unfunded.
  • One new position for the Office of the Ombudsman was moved from 2024 to 2025.
  • Four additional examiner positions, for a total of nine when including the five additional positions proposed in the staff draft, were added to the regions to reflect updates to the NCUA’s examination and supervision program needs for 2024.
  • Additional budget amounts for 2024 totaling $0.1 million net, were added to several offices to account for revised estimates for various contract support costs. Some additional, immaterial adjustments were made to funding levels in the staff draft for technical corrections and to reflect updated information that was not available at the time the staff draft was published.

The recommended final 2024 capital budget is reduced by approximately $1.2 million from the staff draft.  Balances for several completed capital projects were identified to lower the overall level of new capital budget funding in 2024.  The recommended final 2025 capital budget is unchanged from the staff draft.

The recommended final 2024 and 2025 Share Insurance Fund administrative expenses budgets represent increases from the staff draft by $6,000 and $131,000, respectively, due to re-estimated administrative expenses.

[1] Available at https://ncua.gov/files/publications/budget/budget-justification-proposed-2024-2025.pdf

[2] Available at https://www.nascus.org/summaries/ncua-2024-proposed-budget-summary/

[3] Available at www.nascus.org/wp-content/uploads/2023/11/NASCUS-COMMENTS-ON-DOCKET-NCUA-2023-0117.pdf

[4] Available at https://www.nascus.org/pressroom/nascus-testifies-during-ncua-board-2024-budget-briefing/

[5] Available at https://ncua.gov/news/board-meetings-agendas-results/board-agenda-december-14-2023-meeting

FinCEN Alert on COVID-19 Employee Retention Credit Fraud
FIN-2023-Alert007

NASCUS Legislative and Regulatory Affairs Department
December 5, 2023

On November 22, 2023, FinCEN, in coordination with the IRS Criminal Investigation (CI), issued an alert to financial institutions, FIN-2023-Alert007, on fraud schemes related to the COVID-19 Employee Retention Credit (ERC) and is urging financial institutions to identify and report related suspicious activity.

IRS CI has identified ongoing fraud and other scams related to the ERC which have resulted in 323 investigations involving more than $2.8 billion of potentially fraudulent ERC claims throughout tax years 2020 – 2023. These fraudulent claims disrupted the IRS’s ERC claim review process and created significant backlog and delays in the processing of legitimate ERC claims filed by eligible businesses.

The alert includes an overview of the trends and typologies associated with ERC fraud and scams, identifies select red flags to assist financial institutions in identifying and reporting suspicious activity, and reminds financial institutions of their reporting requirements under the Bank Secrecy Act (BSA).

Trends and Typologies of ERC-Related Financial Crimes

IRS CI and other law enforcement agencies have identified several methods in which fraudsters and scammers have utilized the ERC to obtain funds. Cases have identified individuals who have filed fraudulent ERC claims using shell companies or existing, but ineligible, businesses and, in some cases, abused the program to pay for lavish purchases and personal expenses upon receipt of the credit. Additionally, IRS CI has identified cases in which many businesses have been duped into filing ERC claims by third parties.

Filing of Fraudulent Claims

Use of Fabricated and Dormant Entities

The alert indicates that some individuals have fraudulently filed ERC claims with the IRS using fabricated and dormant entities. In the case of a dormant entity, the entity typically had an EIN but did not have any activity and then filed taxes for at least one tax period during the claim period.

Ineligible Businesses

Ineligible businesses included business owners who knowingly applied for the ERC hoping they could obtain the credit even though they are not eligible, including those who had received a Paycheck Protection Program (PPP) loan, who then amended their tax returns misrepresenting their eligibility.

Third-Party Promoters

These “promotors” are also referred to as “ERC mills” that deploy aggressive marketing tactics, including mailing notices designed to look like official IRS communications. They also present themselves as “ERC experts” or tax professionals. Promotion scams are likely to target established businesses to avoid IRS scrutiny. ERC mills neglect to inform businesses of eligibility requirements and avoid signing the ERC return prepared.  Promotors typically charge an upfront fee (sometimes 30 to 40% of the expected ERC) or a contingent fee depending on the amount of the tax credit. They may submit claims on behalf of businesses without their knowledge or use stolen information or use the taxpayer’s personal information to use in other identity theft schemes.

Fraudulent Receipt and Use of ERC Funds

The alert also highlights the following trends related to fraudulent receipt and use of ERC funds:

  • Funds are deposited into a business account that is funded solely by the ERC or to an account with limited transactions;
  • Fraudsters have used the ill-gotten funds for personal purposes including the purchase of luxury goods and vacations;
  • Fraudsters may attempt to conceal receipt of the funds by transferring the funds using a peer-to-peer (“P2P) service;
  • Recipients may attempt to deposit an altered check, closely resembling an ERC Treasury-issued check.

Red Flag Indicators of ERC Fraud

The alert also includes ten “red flag” indicators to assist financial institutions in determining if a transaction is indicative of ERC fraud.

NCUA Final Rule Summary: Charitable Donation Accounts

NASCUS Legislative and Regulatory Affairs Department
December 4, 2023

Summary

In December 2013, the NCUA Board approved the current CDA rule which permits Federal credit unions (FCUs) to fund a CDA, which may hold investments that are otherwise impermissible for Federal credit unions, for use as a charitable contribution or donation under their incidental powers authority. This rule defined a CDA as a hybrid charitable and investment vehicle that FCUs may fund to provide charitable contributions and donations to a qualified charity, defined as a charitable organization or other non-profit recognized as tax-exempt under section 501(c)(3) of the Internal Revenue Code.

Because CDAs can be funded with impermissible investments the Board believes it is necessary to keep in place distinct limits on groups that are beneficiaries of a CDA. Therefore, any group the Board considers adding as a “qualified charity” must be both non-profit and organized for a charitable purpose.

At the May 2023 NCUA Board meeting, the Board issued a proposed rule to amend the CDA rule permitting veterans’ organizations recognized as tax-exempt under section 501(c)(19). According to the IRS website, veterans’ organizations must meet numerous requirements.

Final Rule

At the November 2023 Board meeting, the NCUA issued a final rule amending the charitable donation accounts (CDAs) section of the NCUA’s incidental powers rule.

The amendment adds “a post or organization of past or present members of the Armed Forces of the United States, or an auxiliary unit or society of, or a trust or foundation for, any such post or organization recognized as exempt from taxation under section 501(c)(19) of the Internal Revenue Code (veterans’ organizations)” to the definition of “qualified charity” that a Federal credit union may contribute to using a CDA.

The final rule is effective December 21, 2023.

IRS Lookup for 501(c)(19) Entities

To confirm if an entity is a “qualified charity” for purposes of the final rule there are two methods to identify tax-exempt status under 501(c)(19).

  1. An entity may be searched by utilizing the IRS Online Tax-Exempt Search Tool; or
  2. IRS bulk download, which is available by state and found here Exempt Organizations Business Master File Extract (EO BMF)

Final Rule Summary
FinCEN: Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024

NASCUS Legislative and Regulatory Affairs Department
November 30, 2023

Background

On September 30, 2022, FinCEN published the final Beneficial Ownership Information (BOI) Reporting Rule (Reporting Rule), with an effective date of January 1, 2024. NASCUS summarized the final rule here.

On September 28, 2023, FinCEN issued a proposal that would amend the Reporting Rule by extending the period for new entities to file their BOI reports. FinCEN proposed this extension based on comments received from multiple entities including trade associations, non-profits, and other key stakeholder organizations. As explained in the extension, extending the deadline for reporting companies registered on or after January 1, 2024, and before January 1, 2025, would give those entities additional time to:

  1. Understand and comply with the Reporting Rule;
  2. Obtain the information necessary to complete their initial BOI reports; and
  3. Resolve questions that may arise in the process of completing the initial BOI reports.

Summary

On November 30, 2023, FinCEN issued a final rule amending the Reporting Rule extending the filing deadline for certain BOI reports. Under the Reporting Rule before this amendment, business entities created or registered on or after the rule’s effective date, January 1, 2024, would have been required to file initial BOI reports with FinCEN within 30 calendar days of notice of their creation or registration.

This amendment to the final rule extends the filing deadline from 30 calendar days to 90 calendar days for entities created or registered on or after January 1, 2024, and before January 1, 2025, as initially proposed.

Entities created or registered on or after January 1, 2025, will continue to have 30 calendar days to file their BOI reports with FinCEN.

FinCEN believes this extension will afford entities the time to understand and comply with the reporting requirements as well as obtain the information needed to complete their initial BOI reports.

Update on the Beneficial Ownership Access and Safeguards Proposed Rule

As for access to the BOI database, including how financial institutions should obtain customer consent to access the database, these issues fall under FinCEN’s proposed Access Rule and the forthcoming final rule on beneficial ownership access and safeguards. BOI obtained from the database will also be addressed in future rulemaking of revisions to the 2016 CDD Rule as required

[1] See CTA, Section 6304(d)

Notice of Proposed Rulemaking and Request for Comment
NCUA Parts 701, 741, 746, 748, and 752: Fair Hiring in Banking

NASCUS Legislative and Regulatory Affairs Department
November 30, 2023

The National Credit Union Administration (NCUA) has published a notice of proposed rulemaking and request for comment seeking to incorporate its “Second Chance” Interpretive Ruling and Policy Statement 19-1 (IRPS 19-1) and the Fair Hiring in Banking Act (FHBA) into its regulations. Currently, section 205(d) of the Federal Credit Union Act (FCUA) prohibits, except with the Board’s prior written consent, any person who has been convicted of certain criminal offenses involving dishonesty or breach of trust (a covered offense), or who has entered into a pretrial diversion or similar program in connection with a prosecution for such offense (program entry), from participating in the conduct of the affairs of an insured credit union.

Comments on the proposed rule are due January 8, 2024.

Summary

The proposal would update NCUA’s regulations to reflect recent statutory changes that provide greater employment opportunities for individuals with prior minor criminal offenses while still restricting participation in credit union affairs by individuals who pose undue risks.

The proposal also details the revised consent application process under Section 205(d) and would incorporate Interpretive Ruling and Policy Statement (IRPS) 19-1 as well as the Fair Hiring in Banking Act into NCUA’s regulations.

Section 752.1 What is Section 205(D) of the FCU Act?

The proposed changes would require credit unions to make a reasonable inquiry regarding an applicant’s history to ensure that a person who is subject to the prohibition provision of Section 205(d) is not hired or permitted to participate in the conduct of credit unions’ affairs without the written consent of the NCUA. It would also set out that insured credit unions would be permitted to make conditional offers of employment to prospective applicants.  Finally, it would address the need for a consent application and establish the standard for an application’s approval. The burden would be upon the applicant to establish their application warrants approval.

Section 752.2 Who is covered by Section 205(D)?

Those covered under Section 205(d) of the proposed rule would include:

  • Institution Affiliated Parties (IAPs)[1]
    • Certain IAPs (e.g., independent contractors, are covered depending upon the degree of influence or control over the management or affairs of an insured credit union.
  • Volunteer and de facto employees
  • Directors and officers of affiliates, or joint ventures, would also be covered if they participate in the conduct of affairs of the insured credit union or are able to influence or control the management or affairs of the insured credit union.

Section 752.3 Which offenses qualify as “Covered Offenses” under Section 205(D)?
Conviction or program entry must have been for a criminal offense involving dishonesty or breach of trust.

  • The FHBA defines “criminal offense involving dishonesty” as “an offense under which an individual, directly or indirectly, cheats or defrauds or wrongfully takes property belonging to another in violation of a criminal statute.” The FHBA further provides that the term includes an offense that federal, state, or local law defines as dishonest or for which dishonesty is an element of the offense.
  • The term does not include a misdemeanor criminal offense committed more than 1 year before the date on which an individual files a consent application, excluding any period of incarceration, or an offense involving the possession of controlled substances.
  • Breach of trust would mean a wrongful act, use, misappropriation, or omission with respect to any property or fund that has been committed to a person in a fiduciary or official capacity, or the misuse of one’s official or fiduciary position to engage in a wrongful act, use, misappropriation, or omission.

Section 752.4 What constitutes a conviction under Section 205(D)?

This section would state there must have been a conviction of record for section 205(d) to apply, and that section 205(d) would not apply to arrests, pending cases not brought to trial (unless the person has a program entry as set out in § 752.5), or any conviction reversed on appeal unless the reversal was for the purpose of re-sentencing. The Board notes, however, that covered offenses that have been pardoned—and which are not otherwise excluded by § 752.8—would still require a consent application.

This section also addresses expunged convictions and exclusions for “youthful offender” judgments.

Section 752.5 What constitutes a pretrial diversion or similar program under Section 205(D)?

A pretrial diversion or similar program is a program characterized by a suspension or eventual dismissal or reversal of charges or criminal prosecution upon agreement by the accused to restitution, drug or alcohol rehabilitation, anger management, or community service. The FHBA establishes this definition.

Section 752.6 What are the types of consent applications that can be filed?

The proposed rule would provide that the NCUA will accept applications from an individual or an insured credit union applying on behalf of an individual.

Additionally, the proposal would provide that an individual consent application or a credit union-sponsored consent application may be filed separately or contemporaneously with the appropriate NCUA Regional Office or ONES.

Section 752.7 When must a consent application be filed?

A consent application would not be considered by the NCUA until all sentencing requirements associated with a conviction have been met or all requirements of the program entry have been completed.

Forms and instructions will be made available on the NCUA’s website or at the NCUA’s regional offices in accordance with the FHBA’s statutory mandate.

Section 752.8 De minimis offenses.

The proposed rule would retain the de minimis offenses detailed in IRPS 19-1 and would amend the factors to reflect the FHBA.

  • An individual who has been convicted of 2 or fewer covered offenses need not file if the individual could have been sentenced to a term of confinement in a correctional facility of 3 years or less and/or a fine of $2,500 or less, and the individually actually served 3 days or less of jail time for each including additional factors.
  • A consent application would not be required if there are two convictions or programs entries for a covered offense, and the actions that resulted in both convictions all occurred when the individuals was 21 years of age or younger and the convictions were entered at least 18 months prior to the date of consent application.
  • A consent application would not be required for convictions of writing “bad” checks under certain terms, including if the amount were $2,000 or less and no insured depository institution or credit union was a payee on the checks; and the individual has no more than one other de minimis offense.
  • Convictions on the simple theft of goods, services, or currency would be considered de minimis under certain conditions as outlined in the proposed rule.

Section 752.9 How to file a consent application.

Consent applications filed by a credit union should be filed with the NCUA’s Regional Office where the credit union’s home office is located (or with ONES for credit unions that office supervises.

Consent applications filed by an individual should be filed with the NCUA’s Regional Office where the person lives.

Upon issuance of a final rule the NCUA Board will delegate authority related to consent applications. Regional Directors and the ONES Director will have authority to act on both individual and credit union-sponsored applications. The Board will retain the authority to approve/disapprove individual applications.

Section 752.10 How a consent application is evaluated.

This section will address the factors the NCUA would assess to determine the level of risk the applicant poses to an insured credit union and whether the NCUA would consent to the person’s participation in the credit union’s affairs. It outlines the review process, what is required for review, the determining factors in assessing an application, considerations the NCUA would evaluate when conducting an individualized assessment, and requirements for fidelity bond coverage.

Section 752.11 What will the NCUA do if the consent application is denied?

The NCUA would provide a written denial summarizing or citing the relevant factors from the proposed § 752.10. Paragraph (b) would provide that the applicant can file a written request for reconsideration or appeal under the process contained in 12 CFR part 746, subpart B. That subpart includes uniform procedures by which petitioners may appeal initial agency determinations to the Board.

Prior to submitting an appeal to the Board, the petitioner may make a written request to the appropriate Regional Office or ONES, to reconsider an initial agency determination within thirty calendar days of the date of that determination. Within sixty calendar days of the date of an initial agency determination or, as applicable, a determination by the Regional Office or, if appropriate, ONES, on any request for reconsideration, a petitioner may file an appeal seeking review of the determination by the Board.

Proposed Amendments to § 701.14 on Change in Official or Senior Executive Officer in Credit Unions That Are Newly Chartered or Are in Troubled Condition

Section 701.14 requires that insured credit unions that are newly chartered or troubled file notice with the NCUA before adding, replacing, or changing the duties of a board or committee member or a senior executive officer.

First, the proposed rule would clarify when notice is required and would specify that a credit union must provide notice when adding or replacing any member of its board of directors or committees, employing any person as a senior executive officer of the credit union, or changing the responsibilities of a board member, committee member, or a senior executive officer so that the person would assume a different position.

Second, the proposed rule would increase the amount of time the NCUA has to initially review a notice. The current 10-day notification requirement is not specified in the statute, and NCUA staff has found the 10-day timeframe difficult to meet, as additional information to analyze the request may be required. The Board does not believe that an additional five calendar days would unduly delay the start or change in the position of board members, committee members, or senior executive officers.

Finally, the proposed rule would explicitly state that the notice of disapproval will identify the reason(s) for the denial.

Request for Comments

The Board is seeking comments on all aspects of the proposed rule and is seeking specific comments on eight questions addressing the following.

  1. Scope of the final rule and whether it should include additional information on who may fall within the scope of section 205(d), including persons who participate in the conduct of the affairs of an insured credit union.
  2. Date of offense: Is the Board’s interpretation of the phrases “offense occurred” and “offense committed” as the “last date of underlying misconduct” appropriate, or are there other interpretations the Board should consider? What support do commenters have for other interpretations given the language of the statute?
  3. “Sentencing occurred.” The FHBA exempts offenses committed by individuals 21 years of age or younger if it has been more than 30 months since the sentencing occurred. [43] However, the statute does not define the phrase “sentencing occurred.” The Board proposes to interpret “sentencing occurred” to mean the date on which a court imposed the sentence, not the date on which all conditions of sentencing were completed. The Board seeks public comment on the following topic: Is the Board’s proposed interpretation of the phrase “sentencing occurred” appropriate?
  4. Foreign Convictions. Does section 205(d) encompass foreign convictions and pretrial diversions? What support do commenters have for their position?
  5. Expungements, sealings, and dismissals. The Board seeks public comment on the following topic: Given the new statutory exemption for expunged offenses, is the Board’s more expansive proposed interpretation of expungement—which term includes records that have been expunged by application of law—appropriate?
  6. Offenses involving controlled substances. The Board seeks public comment on the following topic: Is the Board’s interpretation of “offense[s] involving the possession of controlled substances” as applying, at a minimum, to simple possession and possession with intent to distribute appropriate?
  7. De minimis offenses. The Board seeks public comment on the following topic: Is the Board’s current approach to de minimis offenses appropriate? Are there additional offenses that the Board should consider de minimis under section 19? Commenters should provide support for such a designation.
  8. Conforming changes. The Board also requests comments on other conforming changes or updates that it should make to its regulations or guidance to implement the new statutory provisions.

[1] 12 U.S.C. 1786(r)

Summary re: CFPB Proposed Rule on Defining Larger Participants of a Market for General-Use Digital Consumer Payment Applications

12 CFR Part 1090

The Consumer Financial Protection Bureau (CFPB) proposes a rule to define a market for general-use digital consumer payment applications.  The proposed market would cover providers of funds transfer and wallet functionalities through digital applications for consumers’ general use in making payments to other persons for personal, family or household purposes.  Larger participants of this market would be subject to the Bureau’s supervisory authority under the Consumer Financial Protection Act (CFPA).

Comments must be received by January 8, 2024.  The proposed rule can be found here.

Summary

The proposed rule would implement Section 1024 of the CFPA gives the CFPB supervisory authority over all nonbank covered entities participating in a market for “general use digital consumer payment applications.” The proposed market would include providers of funds transfers and wallet functionalities through digital applications for consumers’ general use in marking payments to other persons for personal, family or household purposes. The Bureau is authorized to supervise nonbank covered persons (subject to CFPA Section 1024) for purposes of (i) assessing compliance with Federal consumer financial law; (ii) obtaining information about such persons activities and compliance systems or procedures; and (iii) detecting and assessing risks to consumers and consumer financial markets.  The rule is the sixth in a series of CFPB rulemakings to define larger participants of markets for consumer financial products/services for purposes of CFPA Section 1024(a)(1)(B).

Important Definitions

Consumer Payment Transactions:

The proposed rule defines “consumer payment transactions” to include payments to other persons for personal, household, or family purposes excluding certain transactions.

  • The first component of the consumer payment transaction is that the transaction must result in a transfer of funds by or on behalf of the consumer. The focus is on the sending of the payment and not on the receipt of the payment.
  • The second component of the consumer payment transaction definition is that the consumer must be physically located in a State. This is satisfied when the consumer uses a general use digital consumer payment application on a personal computing device or at a point of sale that is physically located in a State.  By contrast, if a consumer is physically located outside of any State at the time of engaging in a payment transaction, then the payment transaction would not be a consumer payment transaction covered by the proposed rule.
  • The third component of the proposed consumer payment transaction definition is that the funds transfer must be made to another person besides the consumer.
  • The fourth component of the proposed consumer payment transaction definition is that the funds transfer must be primarily for personal, family, or household purposes.

In addition, the proposed definition of “consumer payment transaction” excludes four types of transfers:

  • International money transfers
  • Transfers by consumers (i) that are linked to the consumer’s receipt of a different form of funds (such as a transaction for foreign exchange) or (ii) that is excluded from the definition of “electronic fund transfer” under Section 1005.3(c)(4) of this chapter
  • Payment transactions conducted by a person for the sale or lease of goods/services that a consumer selected from an online or physical store or marketplace operated prominently in the name of such person or its affiliated company.
  • Extensions of consumer credit that are made using a digital application provided by the person who is extending the credit or that person’s affiliated company.

Digital Applications

Payment transactions would be made via “digital applications.”  Under the proposed rule, a “digital application” is defined as a software program accessible to a consumer through a personal computing device such as a mobile phone, smart device, tablet, laptop or desktop computer, etc. The proposed definition is inclusive of software programs:

  • whether downloaded to a personal computing device,
  • accessible from a personal computing device via a website or
  • activated from a personal computing device using an internet browser or from a personal computing device using the consumer’s biometric identifier (fingerprint, palmprint, face, eye or voice).

General Use

The proposed rule defines the term “general use” to mean the absence of significant limitations on the purpose of consumer payment transactions facilitated by the covered payment functionality provided through the digital consumer payment application.  Digital payment applications with general use can serve broad functions for consumers such as sending funds to friends/family, buying a wide range of goods/services at different stores or both.  The definition would clarify that digital consumer payment applications that would facilitate person to person, or peer to peer transfers of funds would qualify as having general use.

The rule would set forth a test to determine whether a nonbank covered person is a larger participant of the general use digital consumer payment applications market.  A nonbank covered person would be a larger participant if it satisfies two criteria:

  • the nonbank covered person (together with its affiliated companies) must provide general use digital consumer payment applications with an annual volume of at least five million consumer payment transactions and
  • the nonbank covered person must not be a small business concern based on the

applicable Small Business Administration (SBA) size standard.

Covered Payment Functionality

The proposed rule specifies two types of covered payment functionalities: funds transfer functionality and wallet functionality.  A nonbank covered person would be participating in the proposed market if its market activity included one or both of these functionalities.  The terms are defined as follows:

  • Funds Transfer Functionality: a consumer payment transaction that is: (1) receiving funds for the purpose of transmitting them; or (2) accepting and transmitting payment instructions. These two types of funds transfer functionalities generally describe how nonbanks help to transfer a consumer’s funds to other persons, sometimes referred to as P2P transfers.  The nonbanks either already hold or receive the consumer’s funds for the purpose of transferring them, or it transmits the consumers payment instructions to another person who does so.
  • Wallet Functionality: a product/service that (1) stores account or payment credentials, including in encrypted or tokenized form; and (2) transmits, routes, or otherwise processes such stored account or payment credentials to facilitate a consumer payment transaction.

If finalized, the Bureau proposes that the rule become effective 30 days after publication in the Federal Register. 

Comments Requested:

While the CFPB is seeking feedback on all aspects of the proposal, they specifically posed the following:

  • The Bureau is seeking comment on the proposed definition of funds transfer functionality. Whether it should be modified and, if so, why?
  • The Bureau is requesting comment on the proposed definition of the term wallet functionality. Whether it sufficiently encompasses digital wallets in the market today; whether it should be modified, and if so, how and why?
  • The Bureau is requesting comment on the proposed definition of digital application. Whether it should be modified, and, if so, how and why?

Final Rule Summary
FinCEN: Use of FinCEN Identifiers in Beneficial Ownership Information Reporting

NASCUS Legislative and Regulatory Affairs Department
November 28, 2023

On November 7, 2023, FinCEN issued a final rule that specifies the circumstances in which a reporting company may report an entity’s FinCEN identifier in lieu of information about an individual beneficial owner.

Summary

A FinCEN identifier is a unique number that FinCEN will issue upon request after receiving the required information. Although there is no requirement to obtain a FinCEN identifier, doing so can simplify the reporting process and allow entities or individuals to provide the required information directly to FinCEN.

The final rule amends FinCEN’s final Beneficial Ownership Information (BOI) Reporting Rule. The amendments specifically respond to concerns from commenters that the reporting of entity FinCEN identifiers could obscure the identities of beneficial owners in a manner that might result in greater secrecy or misleading disclosures. To address this concern, the final rule provides clear criteria that must be met in order for a reporting company to report an intermediate entity’s FinCEN identifier in lieu of information about the individual beneficial owner.

Specifically, the final rule adopts the following changes:

  1. To consistently refer to the entity whose FinCEN identifier the reporting company may use as “another entity” or “the other entity” rather than simply “the entity,” in order to avoid confusion with the reporting company itself; and
  2. To make clear that it is an individual’s ownership interest in another entity that allows the reporting company to report the other entity’s FinCEN identifier in lieu of the individual’s information.

The final rule will be effective January 1, 2024, to align with the effective date of the BOI Reporting Rule.