Summary: NCUA Notice and Request for Comment on the Existing Operating Fee Schedule Methodology

 Summary of NCUA Notice and Request for Comment on the Existing Operating Fee Schedule Methodology

NASCUS Legislative and Regulatory Affairs Department
June 26, 2023

The National Credit Union Administration (NCUA) Board approved for publication in the Federal Register a Notice and Request for Comment Regarding NCUA Operating Fee Schedule Methodology at the June 22, 2023, Board meeting.  The notice would provide a 60-day comment period from its publication date.  In the Notice, the Board proposes to change the exemption threshold below which Federal Credit Unions (FCUs) would not be required to pay the operating fee and proposes to establish a process to update the exemption threshold in future years based on the credit union system’s annual asset growth.

Background

The FCU Act imposes three requirements on the Board related to assessing an operating fee on FCUs:

  1. The fee must be assessed according to a schedule or schedules or other method that the Board determines to be appropriate, which gives due consideration to NCUA’s responsibilities in carrying out the FCU Act and the ability of FCUs to pay the fee;
  2. The Board must determine the period for which the fee will be assessed and the due date for payment; and
  3. The Board must deposit collected fees into the Treasury to defray the Board’s expenses in carrying out the FCU Act. Once collected, operating fees “may be expended by the Board to defray the expenses incurred in carrying out the provisions of [the FCU Act,] including the examination and supervision of [FCUs].”[1]

In 2020, the NCUA published a request for comments on its methodology for determining its Operating Fee Schedule and revised its treatment of capital project budgets and miscellaneous revenues when calculating operating fees.  The Board also made other changes relative to its calculation of annual asset growth adjustments to the operating fee rate tier thresholds for consistency with regulation governing assessment of the annual operating fee.  These inflationary adjustments did not apply, however, to the $1 million asset threshold, small FCUs must exceed before being assessed for an annual operating fee.  Since that time, the operating fee assessment has been applied according to the published methodology, including the last operating fee schedule issued on January 25, 2023[2].

The Board has generally not used Federal Register notices in connection with annual adjustments to the asset tiers or rates of the operating fee schedule. Instead, the Board has opted to adopt such changes at its open meetings. While the Board has varied its practice with respect to operating fee schedule changes, it has done so within what they interpret as the FCU Act’s broad directive that the operating fee schedule should be as “determined by the Board to be appropriate,” subject to its consideration of its expenses and the ability of FCUs to pay.[3]  In addition, the NCUA’s regulation on operating fee processes includes a standing invitation for written comments from FCUs on existing operating fee schedules.[4]  Each year the Board also invites comments on the draft NCUA budget, which includes a detailed explanation of how the operating fee is calculated and how changes to the operating fee rates are determined based on application of the published methodology.

With this in mind, the Board delegated authority to the NCUA’s Chief Financial Officer (CFO) in November 2015 to administer the Board-approved operating fee methodology and to set the operating fees as calculated during each annual budget cycle beginning with 2016.  Although not required to do so under NCUA’s interpretation under the Administrative Procedure Act,[5] the Board did publish its methodology on January 2016, in the Federal Register and requested public comment on the same.[6]

As part of the budget process, the NCUA Board adopts an annual budget in the fall of each year to cover an “operating budget” for the costs of day-to-day operations and a “capital budget” related to estimated capital project expenditures.  Determination of the annual operating fee funding requirements are calculated by subtracting from the annual budget NCUA’s estimates for miscellaneous revenues collected, the Overhead Transfer Tate (OTR) funding of the budget, interest income, and other miscellaneous adjustments made by the Board, including an estimate of unallocated prior-period operating fees collected.

Once the estimated annual operating fee funding requirements are determined, the Board approved methodology is utilized by the CFO to determine the operating fee funding requirements of each individual FCU and make the appropriate recommendation to the Board.

Changes to Operating Fee Methodology and Request for Comment

Relating to the methodology in which operating fee assessments are imposed on individual FCUs, the Board seeks comment on a change to the exemption level below which FCUs are not charged an operating fee.  Currently, FCUs reporting average assets of $1 million or less during the preceding four calendar quarters are exempt from paying an operating fee.  Under the proposal, the Board would raise the average asset exemption level for FCUs to $2 million and annually adjust the exemption threshold in future years.

The inflationary adjustment, calculated as a percentage of average asset growth reported on the call reports over the previous four quarters, would be included in the operating fee calculation presented in the annual draft NCUA budget published by the Chief Financial Officer pursuant to 12 U.S.C. 1789(b).  This adjustment factor would then be factored into the threshold to determine the new asset base below which an institution would not be assessed an operating fee by the NCUA.

The Notice states the Board believes this change would appropriately maintain its current policy of exempting the smallest natural person credit unions from paying the operating fee based on those institutions’ ability to pay the fee.

The Board is also seeking comment on whether either the three-tier operating fee schedule and its regressive approach to fee assessment remains appropriate.  While not pointing to a specific methodology, the Notice does reference whether a flat-rate schedule for all institutions over a certain exemption threshold or another less regressive alternative is more appropriate.

Finally, the Board seeks comments on the equitable distribution of the operating fees across FCUs.  Specifically, they seek an understanding of how any proposals to change the methodology can be justified as fair and equitable not only for those FCUs whose operating fees would decrease but also for those FCUs whose operating fees would increase compared to the current methodology.

[1]  12 U.S.C. 1755(d).

[2] Available at https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/federal-credit-union-operating-fee-schedule-2023

[3] 12 U.S.C. 1755(b).

[4] 12 CFR 701.6(c).

[5] 5 U.S.C. 551 et seq.

[6] 81 FR 4674 (Jan. 27, 2016).

Notice of Proposed Rulemaking and Request for Comment
NCUA Part 721: Charitable Donation Accounts

NASCUS Legislative and Regulatory Affairs Department
June 12, 2023

The National Credit Union Administration (NCUA) has published a proposal to amend the charitable donation accounts (CDA) section of the NCUA’s incidental powers regulation. Specifically, the Board is proposing to add “war veterans’ organizations”, as defined under section 501(c)(19) of the Internal Revenue Code, to the definition of “qualified charity” that a federal credit union may contribute to using a CDA.

Comments are due on or before July 31, 2023.

Summary

Under the current rule, federal credit unions are permitted to fund a CDA, defined as a hybrid charitable and investment vehicle that a federal credit union may fund to provide charitable contributions and donations to a qualified charity. The rule defines “qualified charity” as a charitable organization or other non-profit entity recognized as exempt from taxation under section 501(c)(3) of the Internal Revenue Code.

Proposed Changes

The Board recognizes there may be other non-profit, charitable entities outside of section 501(c)(3) that could be included as a “qualified charity” as defined under the current rule.  For purposes of this proposal, the Board has focused on “veterans’ organizations” as defined by section 501(c)(19). Under 501(c)(19) a “veterans’ organization” must meet a number of requirements.

The Board believes that the attributes listed for 501(c)(19) organizations are aligned with the purposes of the current CDA rule and is proposing to add “veterans’ organizations” to the definition of “qualified charity.”

Comments

The Board has reviewed the list of organizations in 501(c) and believes that several may be considered charitable. However, the Board is requesting feedback on the following:

  1. Should the Board consider adding additional groups, organizations, or entities to the definition of a “qualified charity?”
  2. If yes, which other groups, organizations, or entities should the Board consider? Note commenters are not limited to only those entities listed in section 501(c) of the Internal Revenue Code.
  3. For any suggested group, organization, or entity, please describe how it is non-profit, organized for a charitable purpose, and how it otherwise meets the purposes of the current CDA rule.

Summary re: CFPB Proposal on Residential Property Assessed Clean Energy Financing (Regulation Z)
12 CFR Part 1026

Section 307 of EGRRCPA (Economic Growth Regulatory Relief and Consumer Protection Act) directs the Consumer Financial Protection Bureau (CFPB) to prescribe “ability to repay” (ATR) rules for Property Assessed Clean Energy (PACE) financing and to apply the civil liability provisions of the Truth in Lending Act (TILA) for violations.  In this notice, the CFPB proposes to implement Section 307 of EGRRCPA and to amend Regulation Z to address how TILA applies to PACE transactions to account for the unique nature of PACE.

Comments must be received by July 26, 2023; the proposal can be found here.

Summary

PACE financing is financing to cover the costs of home improvements that result in a tax assessment on the real property of the consumer.   As required by Section 307 of EGRRCPA, the CFPB issued a proposed rule that would do the following:

  • Clarify an existing exclusion to Regulation Z’s definition of credit that relates to tax liens and tax assessments.
  • Make a number of adjustments to the requirements for Loan Estimates and Closing Disclosures under Sections 1026.37 and 1026.38 that would apply when those disclosures were provided for PACE transactions, including:
  • Eliminating certain fields relating to escrow account information;
  • Requiring the PACE transaction and other property tax payment obligations to be identified as separate components of estimated taxes, insurance, and assessments;
  • Clarifying certain implications of the PACE transaction on the property taxes;
  • Requiring disclosure of identifying information for the PACE company;
  • Requiring various qualitative disclosures for PACE transactions that would replace disclosures on the current forms, including disclosures relating to assumption, late payment servicing, partial payment policy, and the consumer’s liability after foreclosure; and
  • Clarifying how unit-periods would be disclosed for PACE transactions.
  • Provide new model forms for the Loan Estimate and Closing Disclosure
  • Exempt PACE transactions from the requirement to establish escrow accounts for certain higher-priced mortgage loans, under proposed Section 1026.41(e)(7).
  • Apply Regulation Z’s Ability to Repay (ATR) requirements in Section 1026.43 to PACE transactions with a number of specific adjustments to account for the unique nature of PACE financing, including requiring PACE creditors to consider certain monthly payments that they know or have reason to know the consumer will have to pay into the consumer’s escrow account as an additional factor when making a repayment ability determination for PACE transactions extended to consumers who pay their property taxes through an escrow account.
  • Provide that a PACE transaction is not a qualified mortgage (QM) as defined in Section 1026.43
  • Extend the ATR requirements and the liability provisions of TILA section 130 to any “PACE company” as defined in proposed Section 1026.43(b)(14).
  • Provide clarification regarding how PACE and non-PACE mortgage creditors should consider pre-existing PACE transactions when originating new mortgage loans.
  • The CFPB proposes that the final rule, if adopted, would take effect at least one year after publication of the final rule in the Federal Register, but no earlier than October 1, which follows by at least six months of Federal Register publication.
  • The CFPB requests comment on all aspects of the proposed rule and on whether there are any other provisions of TILA or Regulation Z that the Bureau should address with respect to PACE transactions. However, the Bureau posed the following questions in the notice of proposed rulemaking:
  • Whether any TILA provisions not addressed in this proposal warrant amendment for PACE?
  • Whether any clarification is required through rulemaking or otherwise with respect to how HOEPA’s provisions, as implemented in Regulation Z, apply to PACE transactions that may qualify as high-cost mortgages
  • The Bureau seeks comment on the interest rates and late fees that consumers may have to pay in connection with their PACE transactions both before and after default. Whether, for example, late fees that apply to all property taxes should be treated differently from contractually-imposed late fees for purposes of HOEPA’s limitations on late fees as implemented in Section 1026.34(a)(8).
  • Seeks comment on proposed Section 1026.37(p)(3) generally, and on whether to require the contact information for the PACE company under the PACE Company heading in all cases, instead of under the “Mortgage Broker” heading when applicable.
  • Whether it should require creditors to disclose specific late-payment information and, if so, what information to require.
  • Whether a periodic statement requirement would benefit PACE consumers
  • Seeks comment on the types of disclosures related to PACE financing that consumers currently receive from PACE creditors, property tax collectors and others.
  • Whether an annual or semi-annual disclosure like the periodic statement would be useful for PACE consumers, and if so, what information it should contain.
  • Whether there are any other mortgage servicing requirements in Regulation Z or X beyond the periodic statement requirement that the Bureau should address in the final rule.
  • Seeks comment on the proposed definition of “PACE Company” and whether it accurately identifies the intended entities and whether the use of this term accounts for the unique nature of PACE financing.
  • Seeks comment on whether Section 1026.43(c) should be amended to permit or require a creditor to consider the effect of potential savings resulting from the home improvement project financed in the PACE transaction (such as lowered utility payments.)
  • Seeks comment on proposed new Section 1026.43(i)(1) and specifically on whether it would provide additional clarity to include the above examples in the commentary to Section 1026.43(i)(1).
  • Seeks comment on this alternative approach and any advantages or disadvantages it has in comparison to proposed Section 1026.43(i)(1)(ii).
  • Seeks comment on its preliminary conclusion not to extend QM to PACE financing

Effective Date

The Bureau proposes that the final rule, if adopted, would take effect at least one year after publication in the Federal Register, but no earlier than October 1, which follows by at least six months from the date of promulgation.  The final rule would apply to covered transactions for which apply to covered transactions for which creditors receive an application on or after this effective date.

U.S. Department of Treasury De-Risking Strategy Report

NASCUS Legislative and Regulatory Affairs Department
May 31, 2023

Background

Section 6215 of the Anti-Money Laundering Act of 2020 (AMLA) requires the Department of Treasury to develop a strategy to mitigate the adverse effects of de-risking after conducting interviews with regulators, non-profit organizations, and other public and private stakeholders. As a result, the Department released, in April 2023,  its first-ever “strategy” report (report) on the topic of “de-risking”.

The report combines a summary of the problem of de-risking with an overview of recommended steps to solve it.

Summary

For this study, Treasury focused on the topic of “de-risking”. De-risking is the practice of financial institutions’ termination or restriction of business relationships indiscriminately with broad categories of clients rather than analyzing and managing the risks of clients in a targeted manner. Treasury further notes this type of practice is inconsistent with the risk-based approach of the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regulatory framework for U.S. financial institutions under the Bank Secrecy Act (BSA) and implementing regulations.

The AMLA mandated that Treasury, in consultation with federal and state banking regulators and appropriate public-and private-sector stakeholders, conduct a formal review of financial institution reporting requirements and develop a strategy to address the issue of de-risking. The report identifies the key customer categories that are impacted the most by de-risking, the top causal factors behind de-risking, and recommended policy options for combatting de-risking.

The report focuses on three specific customer categories:

  • Small and medium-sized Money Service Businesses (MSBs), often used by immigrant communities in the U.S. to send remittances abroad and are highly vulnerable to de-risking.
  • Non-profit organizations (NPOs) operating abroad in high-risk jurisdictions face substantial de-risking challenges that can interfere with their operations.
  • Broad de-risking measures impacting foreign financial institutions with low correspondent banking transaction volumes, specifically those operating in financial environments characterized by high Money Laundering/Terrorist Financing risks.

Also addressed are the regulatory requirements applicable to financial institutions and their potential customers/members, including customer due diligence, enhanced due diligence, SAR filing requirements, and compliance with the Office of Foreign Assets Control (OFAC). In addition to these requirements, the report also addresses any additional guidance and regulation issued by the various federal banking agencies, including the NCUA, while also recognizing the existence of regulatory uncertainty.

Factors Contributing to De-Risking

The report identified several factors that contribute to de-risking including profitability, reputational risk, lower risk appetites of financial institutions, regulatory burdens, and unclear expectations from regulators and sanction regimes.

Profitability

Treasury assessed that profitability is the primary consideration for financial institutions when considering relationships with business customers. As detailed in the report, cost-benefit considerations are the main drivers for financial institutions when determining whether to provide services to certain categories of customers. This is particularly due to the necessary due diligence required to monitor these relationships as well as the hiring, training, and retention of compliance staff to oversee the account relationships.

The report also addresses concerns, especially from small and mid-sized financial institutions that were interviewed[1] and stated “the high cost of conducting the necessary due diligence and account monitoring for… money transmitters transferring funds to recipients in high-risk countries often outweighs the revenue” generated by these accounts.

Regulatory Challenges and Reputational Risk

Not unexpectedly, the report finds financial institutions’ concerns with their ability to manage illicit finance risks and regulatory challenges also play a significant role in de-risking.  Financial institutions interviewed by Treasury stated they were more likely to cease operations in jurisdictions with high illicit finance risks and to exit relationships with classes of customers that they believe present more significant money laundering and terrorist financing risks. Financial institutions interviewed also indicated they tend to avoid certain customers if they determine that a given jurisdiction or class of customer could expose them to heightened regulatory or law enforcement action absent effective risk management. Reputation risk is also of concern to financial institutions if criminals misuse their services.

Perceived Supervisory Expectations

The report further discusses a perception surrounding supervisory expectations. Specifically, financial institutions interviewed feel there is a lack of consistency in how examiners evaluate financial institutions’ AML/CFT programs, particularly with respect to how those programs assess the risk associated with MSB, NPO, and foreign respondent customers.  Those interviewed saw a disconnect between the message of a “risk-based approach” coming from FinCEN guidance in comparison to that of the federal banking regulators and the way examiners interpret the BSA and other regulations.

Also discussed by those interviewed are the additional layers of supervisory complexity from state supervisory authorities. According to those interviewed, the “perceived” lack of consistency among examiners makes financial institutions more risk-averse in dealing with customers “high-risk” customers.

Federal banking agencies had a different response, stating financial institutions may be over-interpreting questions that are not part of the formal examination process and therefore treating the questions as criticism from the agencies. Additionally, according to the federal banking agencies interviewed, certain banks and credit unions do not have the “necessary experience or adequate systems” in place to manage the risks related to certain customers. Also noting, it is not until a financial institution has an examination that they become fully aware of the risks.

Strategy

As discussed, the report acknowledges the primary reason for financial institutions de-risking customer groups is profitability. However, also as identified in the report there is a significant amount of inconsistency between regulatory agencies and financial institutions and the concept of de-risking.  As a result of the findings, Treasury has proposed a strategy designed to reduce de-risking and the adverse consequences of de-risking. The proposed steps are:

  1. Examination Practices Review
    • Review examination practices, including, but not limited to, coordination between FinCEN and the federal banking agencies in the overall examination process, as well as training coordination to address the enhanced training requirements under the AMLA, Section 6307.
  2. Notice Period Analysis
    • Analyze, in coordination with FinCEN and banking supervisors, current financial institution practices and processes related to account termination and whether and how such processes might be improved for customers.
  3. Improve AML/CFT Programs
    • Treasury proposes regulations implementing Section 6101(b) of the AMLA, which requires financial institutions to have effective, reasonably designed, and risk-based AML/CFT programs. These regulations should satisfy the requirements of Section 6101(b) that Treasury should “consider that the extension of financial services to the underbanked and the facilitation of certain financial transactions, including remittances while protecting the financial system from abuse are key policy goals of the United States.
  4. Clarify and Consider Revising MSB BSA Regulations
    • Under Section 6212 of the AMLA, FinCEN should clarify regulation changes to promote financial inclusion and reduce de-risking, including by reviewing BSA/AML regulations and guidance for MSBs.
  5. Improve International Cooperation to Raise AML/CFT Compliance
    • Working with foreign governments to help improve the MSB and correspondent banking regulation and supervision.
  6. Support Regional Consolidation Projects
    • Research and consider regional “consolidation” respondent banking approaches, including mechanisms such as the establishment of a publicly chartered corporation to consolidate regional financial flows into one respondent banking customer.
  7. Support International Financial Institution Efforts on De-risking
    • This could be accomplished through related projects and technical assistance.
  8. Explore the Potential for Emerging Technological Solutions, Including Digital Identity
    • This could include AML/CFT compliance solutions.
  9. Modernization of U.S. Sanctions
    • Treasury will continue to review regulations and FAQs to assess the need for revised or updated guidance concerning appropriate risk-based diligence measures involving humanitarian-related actors and transactions.
  10. Reduce Burdensome Requirements for the Processing of Humanitarian Assistance
    • Treasury will work with financial institutions to encourage adoption of a risk-based approach to access by NPOs to the essential financial services they need to engage in life-saving assistance abroad.
  11. Track and Measure De-risking
    • FinCEN and the federal banking agencies to develop means to track and measure aggregate changes in banking relationships with respondent banks, MSBs, and NPOs, to identify underlying problems better.
  12. Public-Private Sector Engagement
    • Treasury is recommending an open dialogue among public and private sector stakeholders as well as MSBs, NPOs, financial institutions, and regulators.

[1] GAO, “Views on Proposals to Improve Banking Access for Entities Transferring Funds to High-Risk Countries, GAO-22-104792, 15 (Dec. 16, 2021), https://www.gao.gov/assets/gao-22-104792.pdf.

Summary U.S. Department of Treasury: Illicit Finance Risk Assessment of Decentralized Finance

NASCUS Legislative and Regulatory Affairs Department
May 31, 2023

Background

On April 6, 2023, the US Department of Treasury published its first-ever, Illicit Finance Risk Assessment of Decentralized Finance (DeFi). The risk assessment examines key financial crimes risks related to DeFi, as well as potential regulatory responses to the emergence of DeFi.

Treasury’s analysis was issued on the heels of the Financial Action Task Force (FATF) focusing increasing attention on the impacts of innovation in the DeFi space. The FATF sets international standards for anti-money laundering and counter-terrorist financing (AML/CFT).

The risk assessment builds upon Treasury’s other recent national risk assessments and that of Executive Order 14067 “Ensuring Responsible Development of Digital Assets.”

Summary

The risk assessment evaluates how illicit actors are abusing decentralized finance services as well as exploiting vulnerabilities unique to DeFi services. The term DeFi refers broadly to virtual asset protocols and services that purport to allow for some form of peer-to-peer (P2P) transactions.

The assessment found that illicit actors, including ransomware cybercriminals, thieves, scammers, and Democratic People’s Republic of Korea (DPRK) cyber actors, are using DeFi services in the process of transferring and laundering their illicit proceeds. To accomplish this, these illicit actors are exploiting vulnerabilities in the U.S. and foreign AML/CFT regulatory, supervisory, and enforcement regimes as well as the technology underpinning DeFi services. This assessment finds that the most significant current illicit finance risk in this domain is from DeFi services that are not compliant with existing AML/CFT obligations.

Risk Assessment

The risk assessment covers several critical areas to better understand DeFi and the overall risks identified, beginning with an overview of the market structure of the DeFi ecosystem. It also demonstrates how threat actors misuse DeFi services to engage in and profit from illicit activity, especially ransomware attacks, theft, fraud and scams, drug trafficking, and proliferation finance.

The risk assessment then considers the vulnerabilities that enable the use of DeFi services for illicit purposes, including DeFi services’ non-compliance with AML/CFT and sanctions obligations, disintermediation, and a lack of international AML/CFT standards in foreign countries.

The assessment also includes recommendations for the U.S. government to continue and strengthen efforts to mitigate illicit finance risks associated with DeFi services. Finally, the assessment poses several questions to be considered as part of the recommended actions of the assessment to address illicit finance risks.

Findings

The risk assessment found the primary vulnerability that illicit actors exploit stems from non-compliance by DeFi services with AML/CFT sanctions obligations.  Furthermore, DeFi services engaged in covered activity under the Bank Secrecy Act (BSA) have AML/CFT obligations regardless of whether the services claim that they currently are or plan to be decentralized.

Other vulnerabilities identified in the risk assessment include the potential for some DeFi services to be out of scope for existing AML/CFT obligations, having weak or non-existent AML/CFT controls for DeFi services in other jurisdictions, or having poor cybersecurity controls by DeFi services, enabling the theft of funds.

Treasury also found and warns of proliferation finance risks, given North Korea’s use of DeFi services, both to raise funds through hacking and theft, and laundering funds through the DeFi ecosystem.

It also highlighted the transparency of the blockchain as a critical tool in combating financial crimes in DeFi, noting “a wallet address publicly identified with a hack may be the subject of intense public scrutiny, make it hard to launder proceeds in that wallet, even though its owner remains unknown”.

Treasury further indicates, while risk assessments are primarily designed to identify the scope of an issue, the study also includes recommendations for the U.S. government actions to mitigate the illicit finance risks associated with DeFi services which include:

  • Strengthening U.S. AML/CFT regulatory supervision
  • Considering additional guidance for the private sector on DeFi services’ AML/CFT obligations; and
  • Assessing enhancement to address any AML/CFT regulatory gaps related to DeFi services.
  • Continue research and private sector engagement to support understanding of developments in the DeFi ecosystem.
  • Continue to engage with foreign partners.
  • Advocate for cyber resilience in virtual asset firms, testing of code, and robust threat information sharing.
  • Promote responsible innovation of mitigation measures.

Questions

Treasury also welcomes input on the following questions as part of the recommended actions above.

  • What factors should be considered to determine whether DeFi services are a financial institution under the BSA?
  • How can the U.S. government encourage the adoption of measures to mitigate illicit finance risks, such as those identified in Section 5.4 of the report, including by DeFi services that fall outside of the BSA definition of financial institution?
  • The assessment finds that non-compliance by covered DeFi services with AML/CFT obligations may be partially attributable to a lack of understanding of how AML/CFT regulations apply to DeFi services. Are there additional recommendations for ways to clarify and remind DeFi services that fall under the BSA definition of a financial institution of their existing AML/CFT regulatory obligations?
  • How can the U.S. AML/CFT regulatory framework effectively mitigate the risks of DeFi services that currently fall outside of the BSA definition of a financial institution?
  • How should AML/CFT obligations vary based on the different types of services offered by DeFi services?

Summary of CFPB Circular 2023-02: Reopening Previously Closed Deposit Accounts
May 2023

The Consumer Financial Protection Bureau (CFPB) issued Circular 2023-02 to make clear that financial institutions that unilaterally reopen previously closed deposit accounts (without consumer consent) could be found to have engaged in an unfair act or practice under the Consumer Financial Protection Act (CFPA).

The CFPA, an act or practice is unfair when it causes or is likely to cause consumers substantial injury that is not reasonably avoidable by consumers and the injury is not outweighed by countervailing benefits to consumers or to competition.

The Bureau notes that in some instances, after a consumer has completed all the steps required to initiate the process of closing a deposit account and the financial institution completes that process, the financial institution unilaterally reopens the closed account if it the institution receives a debit or deposit to the closed account.  In those instances, the new activity may cause the account to overdraft or additional account maintenance fees.

Unilaterally reopening a closed deposit account to process a debit or deposit may cause substantial injury to consumers

In the circular, the Bureau defines “substantial injury” to include monetary harm, such as fees paid by consumers due to the unfair practice.  Actual injury is not required; significant risk of concrete harm is sufficient. Substantial injury can occur when a small amount of harm is imposed on a significant number of consumers.

In addition to fees, reopening a consumer’s account to accept a deposit increases the risk that an unauthorized third party may gain access to the consumer’s funds.

Consumers likely cannot reasonably avoid injury

An injury is not reasonably avoidable by consumers when consumers cannot make informed decisions or take action to avoid that injury.  Injury that occurs without a consumer’s knowledge or consent, when consumers cannot reasonably anticipate the injury, or when there is no way to avoid the injury even if anticipated, is not reasonably avoidable.

Consumers often cannot reasonably avoid the risk of substantial injury caused by financial institutions’ practice of unilaterally reopening accounts that consumers previously closed because they cannot control one or more of the following circumstances: a third party’s attempt to debit or deposit money, the process and timing of account closure, or the terms of the deposit account agreements.

The injury is likely not outweighed b countervailing benefits to consumers or competition

Reopening a closed account does not appear to provide any meaningful benefits to consumers or competition.  Consumers do not generally benefit when a financial institution unilaterally reopens an account that consumers previously closed. Reopening an account in response to a debit will likely result in penalty fees rather than payment of an amount owed by the consumer.  In addition, while consumers might potentially benefit in some instances where their accounts are reopened to receive deposits that benefit does not outweigh the injuries that can be caused by unilateral account reopening.

Further, not reopening accounts may benefit consumers in certain circumstances.  For example, declining a deposit submitted to a closed account alerts the fund’s sender that they have incorrect account information and may encourage the sender to contact the consumer to obtain updated account information.  Declining a debit also provides an opportunity for the sender of the debit to inform the consumer of any erroneous account information, providing the consumer with the opportunity to make the payment with a current account or through another process.

The Bureau brought an enforcement action regarding this practice under the CFPA’s prohibition against unfair, deceptive or abusive practice provision and concluded that an institution’s practice of reopening consumer accounts without obtaining consumer’s prior authorization and providing timely notice caused substantial injury to consumers that was not reasonably avoidable or outweighed by any countervailing benefit to consumers or to competition.  As such, the Bureau’s circular recommends that government enforcers consider whether a financial institution has violated the prohibition against unfair acts or practices in the CFPA if they discover that a financial institution has unilaterally reopened accounts that consumers previously closed.

Summary of CFPB Advisory Opinion re: Fair Debt Collection Practices Act and Time-Barred Debts
12 CFR Part 1006

The Consumer Financial Protection Bureau (CFPB) issued this advisory opinion to affirm that the Fair Debt Collection Practices Act (FDCPA) and its implementing regulation (Regulation F) prohibit a debt collector from suing or threatening to sue to collect a time-barred debt. Accordingly, a FDCPA debt collector who brings or threatens to bring a state court foreclosure action to collect a time-barred mortgage debt may violate the FDCPA and Regulation F.

The advisory opinion became effective on May 1, 2023, and can be found here.

Summary

The FDCPA and its implementing regulation (Regulation F) govern the conduct of debt collectors.  Regulation F prohibits a debt collector from suing or threatening to sue to collect a time-barred debt.  Regulation F’s prohibition on suits and threats of the suit on time-barred debt is subject to a strict liability standard.  A debt collector who sues or threatens to sue to collect a time-barred debt violates the prohibition even if they were not aware of the prohibition.

The Bureau is issuing this advisory opinion to affirm that (i) the FDCPA and its implementing Regulation F prohibit a debt collector, as that term is defined in the statute and regulation, from suing or threatening to sue to collect a time-barred debt; and (ii) this prohibition applies even if the debt collector neither knows nor should know that the debt is time-barred.  Accordingly, an FDCPA debt collector who brings or threatens to bring a state court foreclosure action to collect a time-barred mortgage debt may violate the FDCPA and Regulation F. The opinion applies to debt collectors as defined in Section 803(6) of the FDCPA.

The Bureau also notes that a broad range of non-foreclosure debt collection-related activity, such as communicating with consumers about defaulted mortgages, can be covered by the FDCPA.  Applicable debt collectors undertaking such activity are subject to the other requirements and prohibitions of the statute and Regulation F when collecting debt, whether or not that debt is time-barred.  These include, for example, the prohibition on debt collectors; falsely representing the character, amount, or legal status of any debt; cannot legally be taken or that is not intended to be taken; and selling, transferring for consideration, or placing for collection a debt that the debt collector knows or should know has been paid or settled or discharged in bankruptcy.

The Bureau notes that, although not the focus of this advisory opinion, entities that sell or collect on second mortgages who are mortgage servicers may also be subject to certain requirements under the Real Estate Settlement Procedures Act, the Truth in Lending Act, and the CFPB’s mortgage servicing regulations.

Summary re: CFPB Executive Summary of the Small Business Lending Rule

Section 1071 of the Dodd-Frank Act amended the Equal Credit Opportunity Act (ECOA) to require financial institutions to compile data regarding certain business credit applications and report that data to the CFPB.  Section 1071 specifies several data points that financial institutions are required to report and provides authority for the CFPB to require financial institutions to report additional data points that the CFPB determines would aid in fulfilling Section 1071’s purposes.  The amendments are designed to facilitate the enforcement of fair lending laws and enabling the identification of business and community development needs/opportunities for women-owned, minority-owned, and small businesses.  There are a number of requirements regarding information to be compiled, such as a requirement that financial institutions restrict certain persons’ access to certain information, requirements regarding maintaining certain information, and requirements regarding the reporting/publication of data.

Covered Financial Institution

  • Any partnership, company, corporation, association (incorporated/unincorporated), trust, estate, cooperative organization, or other entity that engages in any financial activity and that originated at least 100 covered originations in each of the two preceding calendar years.
  • The final rule applies to a variety of entities that engage in small business lending as long as they satisfy the origination threshold. Applicable institutions will need to determine if they are considered “covered” on an annual basis.
  • A covered financial institution must collect and report data about an application if the application is from a small business and is for a covered credit transaction. A covered credit transaction is an extension of business credit under Regulation B.  Such transactions can include loans, lines of credit, credit cards, merchant cash advances, and credit products used for agricultural purposes.
  • Under the final rule, a “covered financial institution” is required to collect and report the following data points:
    • A unique identifier;
    • The application date;
    • The application method;
    • The application recipient;
    • The action taken by the covered financial institution on the application; and
    • The action taken date.
  • For reportable applications that are denied, there is an additional data point for denial reasons.
  • For reportable applications that are approved but not accepted or that result in an origination, there are additional data points for the amount approved or originated and for pricing information.
  • The final rule requires a financial institution to report data points based on information that could be collected from the applicant or an appropriate third-party source. The data points include information specifically related to the credit being applied for and information related to the applicant’s business.  These data points are:
    • Credit type;
    • Credit purpose;
    • The amount applied for;
    • A census tract based on an address or location provided by the applicant;
    • Gross annual revenue for the applicant’s preceding fiscal year;
    • A three-digit North American Industry Classification System (NAICS) code for the applicant;
    • The number of people working for the applicant;
    • The applicant’s time in business; and
    • The number of the applicant’s principal owners.
  • The final rule requires a financial institution to report certain data points based solely on the demographic information collected from an applicant. These data points are:
  • The applicant’s minority-owned, women-owned, and LGBTQI+ owned business status; and
  • The applicant’s principal owners’ ethnicity, race, and sex.
  • A financial institution is required to ask applicants to provide this information and is required to report the demographic information solely based on the responses the applicant provides. However, an institution can not require an applicant/other person to provide this information. If an applicant fails/declines to provide the information, the institution would report the failure/refusal.
  • The final rule also includes a sample data collection form that financial institutions can use to collect this demographic information from applicants and to provide these required notices. Institutions can not discourage applicants from responding to a request for applicant data and must maintain procedures to collect applicant-provided data at a time and in a manner that are reasonably designed to obtain a response.
  • Institutions are permitted to rely on information provided by an applicant or appropriate third-party source; institutions are required to report verified information it chooses to verify
  • Generally, institutions are required to report the data to the CFPB by June 1 of the year following the calendar year in which the financial institution collected the data. The Bureau will determine what data will be made available to the public on an annual basis.
  • The final rule has recordkeeping requirements, including the requirement to retain copies of small business lending application registers and other evidence of compliance for at least three years.
  • The rule becomes effective 90 days after publication in the Federal Register. However, compliance is not required at that time. The rule has established compliance date tiers that differ depending on the number of covered originations an institution originated in 2022 and 2023.

Summary: CFPB Statement of Policy Regarding Prohibition on Abusive Acts or Practices 

12 CFR Chapter X

The Consumer Financial Protection Act (CFPA) prohibits any “covered person” or “service provider” from “engaging in any unfair, deceptive, or abusive acts or practices” and defines abusive conduct.  An abusive act or practice: materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service, or takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product/service, the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service, or the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

The CFPB issued this policy statement to summarize those actions and explain how the CFPB analyses the elements of abusiveness through relevant examples, with the goal of providing an analytical framework to fellow government enforcement/supervisory agencies and industry on how to identify violative acts or practices.

The policy statement is applicable as of April 12, 2023.  The Bureau is accepting comments on this policy statement until July 3, 2023. 

Summary

The Consumer Financial Protection Act of 2010 (CFPA) banned abusive conduct.  Under the CFPA, there are two abusiveness prohibitions.  An abusive act or practice is an act or practice that:

  • materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product/service; or
  • takes unreasonable advantage of:
  • A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the products or service;
  • The inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
  • The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

Abusiveness requires no showing of substantial injury to establish liability, but is focused on conduct that Congress presumed to be harmful or distortionary to the proper functioning of the market.  An act/practice need only fall into one of the categories noted above to be considered “abusive.”

Materially Interfering with Consumers’ Understanding of Terms/Conditions

  • The first abusiveness prohibition concerns situations where an entity “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service.” Material interference can be shown when an act or omission is intended to impede consumers’ ability to understand terms or conditions, has the natural consequence of impeding consumers’ ability to understand, or actually impedes understanding.
  • Material interference may include actions/omissions that obscure, withhold, de-emphasize, render confusing, or hide information relevant to the ability of a consumer to understand terms and conditions. Interference can take numerous forms, such as buried disclosures, physical or digital interference, overshadowing and various other means of manipulating consumers’ understanding.
  • There are a number of methods to prove material interference with a consumer’s ability to understand terms or conditions, including but not limited to those described below.
  • While intent is not a required element, it is reasonable to infer that an act or omission materially interferes with consumers’ ability to understand a term or condition when the entity intends it to interfere;
  • Material interference can be established with evidence that the natural consequence of the act or omission would be to impede consumers’ ability to understand; and
  • Material interference can also be shown with evidence that the act or omission did in fact impede consumers’ actual understanding.

Taking Unreasonable Advantage

  • The second form of “abusiveness” under the CFPA prohibits entities from taking unreasonable advantage of certain circumstances. Congress determined that it is an abusive act or practice when an entity takes unreasonable advantage of three particular circumstances.  The circumstances are:
  • A “lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service.” This circumstance concerns gaps in understanding affecting consumer decision-making.
  • The “inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service.” This circumstance concerns unequal bargaining power where consumers lack the practical ability to switch providers, seek more favorable terms, or make other decisions to protect their interests.
  • The “reasonable reliance by the consumer on a covered person to act in the interests of the consumer. This concerns consumer reliance on an entity, including when consumers reasonably rely on an entity to make the a decision for them or advise them on how to make a decision.
  • Under the CFPA, it is illegal for an entity to take unreasonable advantage of one of these three circumstances, even if the condition was not created by the entity. Evaluating “unreasonable advantage” involves an evaluation of the facts and circumstances that may affect the nature of the advantage and the question of whether the advantage-taking was unreasonable under the circumstances.  The policy statement provided examples such as:
    • Lack of Understanding
      • When there are gaps in understanding regarding the material risks, costs, or conditions of the entity’s product or service, entities may not take unreasonable advantage of that gap. The prohibition does not require that the entity caused the person’s lack of understanding through untruthful statements or other actions or omissions.
    • Inability of Consumers to Protect Their Interests
      • When there are concerns about “the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service.” In these instances, there is concern that entities will take unreasonable advantage of the unequal bargaining power. This may occur at the time of, or prior to, the person selecting the product or service during their use of the product or service or both.
      • The consumer “interests” contemplated include monetary and non-monetary interests including but not limited to property, privacy or reputational interests. People also have interests in limiting the amount of time or effort necessary to obtain consumer financial products or services or remedy problems related to those products or services.  People also have interests in limiting the amount of time or effort necessary to obtain consumer financial products/services or remedy problems related to those products/services.
      • A consumer’s “inability” to protect their interests includes situations when it is impractical for them to protect their interests in selecting or using a consumer financial product or service.
      • The nature of the customer relationship may also render consumers unable to protect their interests in selecting or using a consumer financial product or service. People are often unable to protect their interests when they do not elect to enter into a relationship with an entity and cannot elect to instead enter into a relationship with a competitor.
      • Entities may not take advantage of the fact that they are the only source for important information or services.
    • Reasonable Reliance
      • Entities can not take unreasonable advantage of a consumer based on the “reasonable reliance by the consumer on the covered person to act in the interests of the consumer.”
      • There are a number of ways to establish reasonable reliance, including but not limited to the two described below:
      • Reasonable reliance may exist where an entity communicates to a person or the public that it will act in its customers’ best interest, or otherwise holds itself out as acting in the person’s best interest.
      • Reasonable reliance may also exist where an entity assumes the role of acting on behalf of consumers or helping them to select providers in the market.

Summary of NCUA Letter 23-CU-04: Interagency Policy Statement on Allowances for Credit Losses
(Revised April 2023)

NASCUS Legislative and Regulatory Affairs Department
April 25, 2023

The National Credit Union Administration, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (collectively, the agencies) are issuing a revised interagency policy statement on allowance for credit losses (ACLs).  The revision is issued in response to changes to U.S. generally accepted accounting principles (GAAP) promulgated by the Financial Accounting Standards Board (FASB) in March 2022.

On June 1, 2020, the agencies published an interagency policy statement[1] related to changes to GAAP as promulgated by the FASB in ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

In March 2022, the FASB further amended Topic 326 with the issuance of ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructuring and Vintage Disclosures.  ASU 2022-02 eliminates the recognition and measurement accounting guidance for Troubled Debt Restructurings (TDR) by creditors upon adoption of Topic 326.

To maintain conformance with GAAP, the agencies are revising their ACLs policy statement to remove references to TDRs and correct a citation in footnote 4 of the original statement.  No other changes are being made.

The policy statement continues to describe the measurement of expected credit losses in accordance with FASB ASC Topic 326; the design, documentation, and validation of expected credit loss estimation processes, including the internal controls over these processes; the maintenance of appropriate ACLs; the responsibilities of boards of directors and management; and examiner reviews of ACLs and is effective at the time of each institutions adoption of Topic 326[2].

The following policy statements are no longer effective for an institution upon its adoption of FASB Topic 326:

  • The December 2006 Interagency Policy statement on the Allowance for Loan and Lease Losses;
  • The July 2001 Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions; and
  • The NCUA’s May 2002 Interpretive Ruling and Policy Statement 02-3, Allowance for Loan and Lease Losses Methodologies and Documentation for Federally Insured Credit Unions.

The aforementioned ALLL Policy Statements will be formally rescinded after FASB Topic 326 is instituted for all institutions.

[1] 85 FR 32991 (June 1, 2020).

[2] As noted in Accounting Standards Update 2019-10, FASB ASC Topic 326 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, for public business entities that meet the definition of a Securities Exchange Commission (SEC) filer, excluding entities eligible to be small reporting companies as defined by the SEC. FASB ASC Topic 326 is effective for all other entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all entities, early application of FASB ASC Topic 326 is permitted as set forth in ASU 2016-13.

Final Rule Summary NCUA: Subordinated Debt

NASCUS Legislative and Regulatory Affairs Department
March 24, 2023

The NCUA Board has issued a final rule amending the Subordinated Debt Rule, which was finalized in December 2020 with an effective date of January 1, 2022. This final rule makes two changes to the December 2020 rule. The changes are related to the maturity of Subordinated Debt Notes and Grandfathered Secondary Capital (GSC).

Specifically, the final rule replaces the maximum permissible maturity of Subordinated Debt Notes (Notes) with a requirement that any credit union seeking to issue Notes with maturities longer than 20 years must demonstrate how the instrument would continue to be considered “debt.”  The final rule also extends the Regulatory Capital Treatment of GSC to the later of 30 years from the date of issuance or January 1, 2052. This extension aligns with the U.S. Department of Treasury’s Emergency Capital Investment Program (ECIP).

The final rule also includes four minor modifications to the current rule to make it more user-friendly and flexible.

The rule is effective April 26, 2023. The final rule can be found here.

Summary

At the September 2022 meeting, the Board issued a notice of proposed rulemaking to amend the current rule in several ways. [1] The final rule adopts the proposed rule without further amendment.

First, to align with Treasury’s Emergency Capital Investment Program (ECIP), the final rule revises §702.401(b) permitting Grandfathered Secondary Capital to be included in Regulatory Capital for up to 30 years from the later of the date of issuance or January 1, 2022.

Relevant to the final rule, Treasury offered either 15 or 30-year maturity options for ECIP investments. Before the issuance of this final rule, the maximum term for Subordinated Debt Notes (Notes) was limited to a maximum of 20 years.

Second, the final rule removes the maximum maturity of 20 years from §702.404(a)(2). In its place, a credit union must provide certain information in its application for preapproval under §702.408 when applying to issue Notes with maturities longer than 20 years. To demonstrate the issuance is debt, the final rule requires a credit union applying to issue Notes with maturities longer than 20 years to submit, at the discretion of the Appropriate Supervision Office, one or more of the following:

  • A written legal opinion from Qualified Counsel.
  • A written opinion from a licensed certified public accountant (CPA).
  • An analysis conducted by the credit union or independent third party.

In addition to the substantive changes discussed, the final rule makes several minor changes to provide clarity, make the rule more user-friendly, and align the rule with current agency practices.

First, the rule amends the definition of “Qualified Counsel” to clarify where such person(s) must be licensed to practice law by removing the phrase “in the relevant jurisdiction(s)” from the definition of “Qualified Counsel.”

Second, the final rule amends §702.408(b)(7) and 702.409(b)(2) to remove the statement of cash flow from the Pro Forma Financial Statements requirement and replace it with a requirement for “cash flow projections.”

Third, the final rule amends the section of the current rule addressing the filing of documents and inspection of documents by removing the phrase “inspection of documents” from the titling of this section. It replaces the current requirement that a credit union submits all applicable documents via the NCUA’s website with a requirement that a credit union makes all submissions directly to the Appropriate Supervision Office.

Finally, the final rule revises §702.414(c) by removing “(“discounted secondary capital” recategorized as Subordinated Debt)” from the description of Grandfathered Secondary Capital that may be redeemed by a credit union.

[1] 87 FR 60326 (Oc. 5, 2022)

Summary re: CFPB Review/Request for Comment: Regulation Z Mortgage Loan Originator Rules Review Pursuant to the Regulatory Flexibility Act

12 CFR Part 1026

The Consumer Financial Protection Bureau (CFPB) issued a notice and request for comments regarding a review of Regulation Z’s Mortgage Loan Originator Rules pursuant to Section 610 of the Regulatory Flexibility Act (RFA).

Comments must be received by May 1, 2023 and the notice can be found here.

Summary:

Regulation Z, which implements the Truth in Lending Act, among other things, imposes certain requirements on: loan originator compensation; qualification of; and registration or licensing of, loan originators; compliance procedures for depository institutions; mandatory arbitration; and the financing of single premium credit insurance.  As part of the review, the Bureau is seeking comment on the economic impact of the loan originator rules on small entities. These comments may assist the Bureau in determining whether the loan originator rules should be continued without change or amended or rescinded to minimize any significant economic impact of the rules upon a substantial number of such small entities, consistent with the stated objectives of applicable Federal statutes.

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

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

Request for Comment:

The Bureau asks the public to comment on the impact of Regulation Z’s Mortgage Loan Originator Rules on small entities by reviewing the following factors.  Where possible, please submit detailed comments, data, and other information to support any submitted positions.

  • The continued need for the Rules based on the stated objectives of applicable statutes and the Rules;
  • The complexity of the Rules;
  • The extent to which the Rules overlap, duplicate or conflict with other Federal rules, and, to the extent feasible, with State and local governmental rules;
  • The degree to which technology, market conditions, or other factors have changed the relevant market since the rule was evaluated, including:
  • How the impacts of the Rules as a whole, and of major components or provisions of the Rules, may differ by origination channel, product type, or other market segment;
  • The current scale of the economic impacts of the Rules as a whole, and of major components or provisions of the Rules, on small entities; and
  • Other current information relevant to the factors that the Bureau considers in completing a Section 610 review under the RFA, as described above.