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

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.

CFPB Summary re: Credit Card Penalty Fees Proposal

12 CFR Part 1026

The Consumer Financial Protection Bureau (CFPB) issues this proposal to amend Regulation Z, which implements the Truth in Lending Act (TILA) to better ensure that the late fees charged on credit card accounts are “reasonable and proportional” to the late payment as required under TILA.  The proposal would adjust the safe harbor dollar amount for late fees to $8 and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type; provide that the current provision that provides for annual inflation adjustments for the safe harbor dollar amounts would not apply to the late fee safe harbor amount; and provide that late fee amounts must not exceed 25 percent of the required payments.

Comments must be received by May 3, 2023.  The proposal can be found here.

Summary:

The Bureau is proposing to amend provisions in Section 1026.52(b) and its accompanying commentary as they relate to credit card late fees.  Currently, under this section, a card issuer must not impose a fee for violating the terms or other requirements of a credit card account under an open-end consumer credit plan, such as a late payment, exceeding the credit limit or returned payments, unless the issuer has determined that the dollar amount of the fee represents a reasonable proportion of the total costs incurred by the issuer for that type of violation as set forth in Section 1026.52(b)(1) or complies with the safe harbor provisions set forth in Section 1026.52(b)(1)(ii).  Section 1026.52(b)(ii) currently sets forth a safe harbor of $30 generally for penalty fees, except that it sets forth a safe harbor of $41 for each subsequently violation of the same type that occurs during the same billing cycle or in one of the next six billing cycles.

The Bureau’s proposal is limited to late fees at this time.  The proposal would amend Section 1026.52 and its accompanying commentary to ensure that late fees are reasonable and proportional.  Specifically, it would:

  • Amend the section to lower the safe harbor dollar amount for late fees to $8 and to no longer apply to late fees a higher safe harbor dollar amount for subsequent violations of the same type that occur during the same billing cycle or in one of the next six billing cycles.
  • The proposal would remove the annual inflation adjustments for the safe harbor late fee dollar amounts.
  • The proposal would amend the section to provide that late fee amounts must not exceed 25 percent of the required payment; currently, late fee amounts must not exceed 100 percent.
  • The proposal would also amend the commentary to revise current examples of late fee amounts to be consistent with the proposed $8 safe harbor late fee amount discussed.

Comments Requested:

The Bureau seeks comment on the following:

  • Whether card issuers should be prohibited from imposing late fees on consumers that make the required payment within 15 calendar days following the due date.
  • Whether, as a condition of using the safe harbor for late fees, it may be appropriate to require card issuers to offer automatic payment options or to provide notification of the payment due date within a certain number of days prior to the due date or both.
  • Whether the same or similar changes should be applied to other penalty fees such as over the limit fees, returned-payment fees and declined access check fees or in the alternative, whether the Bureau should finalize the proposed safe harbor for late fees and eliminate the safe harbors for other penalty fees.
  • Whether instead of revising the safe harbor provisions in Section 1026.52 (as they apply to late fees), the Bureau should instead eliminate the safe harbor provisions in Section 1026.52 for late fees or should instead eliminate the safe harbor for all penalty fees, including late fees, over the limit fees, returned payment fees and declined access check fees.
  • Whether or not the cost analysis provisions found in Section 1026.52, would need to be amended, and if so, how?
  • All aspects of these proposed amendments to the commentary to Section 1026.52 including comment on what additional amendments may be needed to help to ensure clarity and compliance certainty.
  • The proposed clarification of the commentary to Section 1026.52(b)(1)(i), including comment on whether any additional clarification may be needed.
  • Whether there are other specific clarifications that should be made to the provisions of the commentary providing guidance on how to perform a cost analysis under the rule.
  • Whether potential revisions to the cost analysis provisions are relevant to both retaining the safe harbor provisions as proposed or eliminating the safe harbor provisions for late fees.
  • What additional guidance, if any, should be added to the commentary concerning the specific costs and other factors that card issuers may take into account in determining late fee amounts, including any relevant data or information.
  • Whether and to what extent to rely on the Bureau’s analysis of data related to collection costs, deterrence, and consumer conduct, as discussed above, in making any revisions to the cost analysis provisions.
  • What additional requirements related to card issuer’s internal processes and procedures for calculating and documenting costs, if any, the Bureau should adopt to ensure compliance.
  • Whether to eliminate the safe harbor for all other credit card penalty fees, including fees for returned payments, over the limit transactions, and fees charged when payment on a check that accesses a credit card account is declined.
  • What guidance, if any, should be added to the cost analysis provisions in Section 1026.52 or related commentary concerning the specific costs and other factors that card issuers may take into account in determining that fee amounts are reasonable and proportional to the costs of the specific violations.
  • Potential future monitoring or other approaches to ensure that the late fee amount is consistent with the reasonable and proportional standard.
  • Whether automatic annual adjustments to reflect changes in the CPI should be eliminated for all other penalty fees subject to Section 1026.52 including over the limit fees, returned payment fees, and declined access check fees.
  • Whether Section 1026.52 should be amended to provide for a courtesy period which would prohibit late fees imposed within 15 calendar days after each payment date.
  • Whether, if a 15 day courtesy period is required, the courtesy period should be applicable only to late fees assessed if the card issuer is using the late fee safe harbor amount or, alternatively, if the courtesy period should be applicable generally (regardless of whether the card issuer assesses late fees pursuant to the safe harbor amount set forth in Section 1026.52.
  • Whether a courtesy period of fewer or greater than 15 days may be appropriate

 

  • Whether a 15 day courtesy period should apply to the other penalty fees that are subject to Section 1026.52 including the over the limit fees and returned payment fees and if so, why?
  • Whether the dollar amount associated with the other penalty fees covered by Section 1026.52 should be limited to 25 percent of the dollar amount associated with the violation.
  • Whether the late fee amounts of $35 in the sample forms/clauses, as applicable, should be revised to set forth late fee amounts of $8, and whether the maximum late fee amounts of “up to $35” in these sample forms or clauses should be revised to set forth a maximum late fee amounts and maximum late fee amounts in the examples are consistent with the proposed $8 late fee safe harbor.
  • Whether to restrict card issuers from imposing a late fee on a credit card account unless the consumer has not made the required payment within 15 calendar days following the due date.
  • Effective ways to help ensure that consumers understand that a 15-day courtesy period only relates to the late fee, and not to other possible consequences of paying late, such as the loss of a grace period or the application of a penalty rate.
  • Whether the $8 safe harbor threshold amount that is being proposed for late fees should also apply to other penalty fees, including over the limit fees and returned-payment fees.
  • Whether the Bureau should revise the maximum amount of the over the credit limit fees and returned payment fees should on these forms to be “up to $8.”
  • Whether the 15-day courtesy period should be provided with respect to all penalty fee, including the over the credit limit fees and returned payment fees. If the Bureau were to adopt the 15-day courtesy period to all penalty fees, the Bureau solicit comment on the 15-day courtesy period should be disclosed in the five sample forms discussed.

Summary – CFPB Compliance Bulletin and Policy Guidance 2023-01: Unfair Billing and Collection Practices After Bankruptcy Discharges of Certain Student Loan Debts

12 CFPB Chapter X

The Consumer Financial Protection Bureau issued this Compliance Bulletin and Policy Guidance to address the treatment of certain private student loans following bankruptcy discharge.

The bulletin becomes effective upon publication in the Federal Register and can be found here.

Summary:

In order to secure a discharge of “qualified education loans” in bankruptcy, borrowers must demonstrate that the loans would impose an undue hardship if not discharged.  Qualified education loans receive special treatment under Section 523(a)(8) of the Bankruptcy Code.  In practice, the majority of student loans meet at least one of the criteria for “special treatment” under the Bankruptcy Code and therefore, are not eligible for discharge by a general order of discharge.

However, some loans for educational purposes that borrowers may think of as “private student loans” are not exempt from the general order of discharge.  These include:

  • Loans made to attend non-Title IV schools;
  • Loans made to cover fees and living expenses incurred while studying for the bar exam or other professional exams;
  • Loans made to cover fees, living expenses incurred while studying for the bar exam or other professional exams;
  • Loans made to cover fees, living expenses, and moving costs associated with medical or dental residency;
  • Loans made in amounts in excess of the cost of attendance,
  • Loans to students attending school less than half-time; and
  • Other loans made for non-qualified higher education expenses.

Any private student loans in these categories are discharged by standard bankruptcy discharge orders, just like most other unsecured consumer debts.  In addition to not fitting the definition of “qualified education loan” these loans are not made, insured or guaranteed by a governmental unit, and are not educational benefits, scholarships or stipends.  The obligations at issue here are originated as loans requiring repayment; educational benefits, scholarships, and stipends.  In contrast are grants, where repayment is only triggered if the student fails to meet a condition of the grant.

CFPB examiners found that servicers of various types of student loans failed to maintain policies/procedures for distinguishing between loan types that are discharged in the regular course of a bankruptcy proceeding (generally, non-qualified education loans) and loan types that require consumers to initiate an adversarial proceeding and meet the “undue hardship” standard to receive bankruptcy relief.  Examiners determined that student loan servicers engaged in an unfair act or practice, in violation of the Dodd Frank Act, when they resumed collection of debts that were discharged by bankruptcy courts for non-qualified education loans.

The CFPB’s supervisory observations and consumers complaints show that servicers continued to make collection attempts on student loans that were discharged through bankruptcy in many instances.  This violates Federal consumer financial law.  The CFPB expects servicers to proactively identify student loans that are discharged without an undue hardship showing and permanently cease collections following a standard bankruptcy discharge order.

The CFPB is prioritizing student loan servicing oversight work in the coming year, including a focus on evaluating whether lenders and servicers cease collection of applicable student loans once they have been discharged.  The CFPB plans to play particular attention to:

  • Whether student loan servicers continue to collect on loans that are discharged by a bankruptcy discharge order;
  • Whether servicers and loan holders have adequate policies and procedures to identify loans that are discharged by a bankruptcy discharge order and loans that require the borrower to go through an adversarial proceeding to demonstrate that they meet the undue hardship standard; and
  • Whether servicers provide accurate information to borrowers about the status of their loans and the protections that bankruptcy offers.
Notice of Proposed Rulemaking and Request for Comment
NCUA: Chartering and Field of Membership

NASCUS Legislative and Regulatory Affairs Department

On February 28, 2023, the NCUA published a notice of proposed rulemaking that would amend its chartering and field of membership (FOM) rules. If finalized the proposal would provide amendments to:

  • Expand financial services to low- and moderate-income communities;
  • Expand membership eligibility to family members after the death of a member
  • Streamline requirements for community-based FOM applications and clarify procedures.

The proposed amendments result from the agency’s experience in addressing FOM issues relating to community charters and service to underserved areas, along with its study of FOM issues through the Board’s Advancing Communities through Credit, Education, Stability, and Support (ACCESS) initiative. Additionally, the Board is seeking feedback about several aspects of FOM issues for consideration with respect to future policy refinements.

Due to the scope and complexity of the proposed changes and additional issues presented for feedback, the Board has issued the proposal with a 90-day comment period.

The proposed rule can be found here. Comments are due May 30, 2023.

Summary

The proposed rule would make nine changes to the NCUA’s Chartering and Field of Membership Manual (Manual) to enhance consumer access to financial services while reducing duplicative or unnecessary paperwork and administrative requirements. The NCUA states the goal of the proposed changes is to eliminate unnecessary burdens while enhancing the agency’s focus on the core principles of credit union membership. The proposed changes cover underserved areas, community-based FOMs, and some more broadly applicable FOM provisions.

Underserved Area Additions

The Federal Credit Union Act (FCUA) currently permits only multiple common bond FCUs to add underserved areas to their FOM beyond the common bond requirements specified in the FCUA. [1]

Currently, if a multiple common bond FCU seeks to add an underserved area to its FOM as an investment area it must satisfy the CDFI Fund’s economic distress criteria.[2] Based on feedback from the industry surrounding these criteria and the requirements of the current Manual the NCUA Board is proposing four changes to the requirements that apply to multiple common bond FCUs that seek to serve underserved areas.

The proposed changes would accomplish the following:

  1. Clarify the Board’s intent to provide flexibility to multiple common bond FCUs serving underserved areas based on rural districts;
  2. Clarify how the NCUA applies the CDFI Fund’s economic distress criteria as the FCUA requires;
  3. Eliminate census block groups as a geographic unit for composing underserved areas, in adherence to a regulatory change that the CDFI Fund has adopted; and
  4. Simplify and reduce the burden for FCUs on the required statement of unmet needs that must accompany a request to serve an underserved area.

Community Charter Conversions and Expansions

The proposed rule would make three changes to reduce the regulatory burden for community charter applications or conversions. Specifically, the proposed rule would:

  1. Establish a simplified business and marketing plan for community charter applications;
  2. Provide a standardized, fillable application for community charter conversion or expansion requests; and
  3. Eliminate the requirement for Federally Insured State Chartered Credit Unions (FISCUs) applying to convert to a federal community charter to submit a business and marketing plan under certain conditions.

After studying the existing requirements and considering its “substantial experience in processing and reviewing various applications” the Board is proposing targeted relief in this area. The agency feels the changes would not undermine the goals that the plans serve and would instead reduce or eliminate paperwork requirements while “sharpening the agency’s focus on the substantive merits of each application.”

Simplified Business and Marketing Plan

Currently, credit unions are required to provide a description of the current and proposed office/branch structure, including a general description of the location(s), parking availability, public transportation availability, drive-through service, lobby capacity, or any other service feature illustrating community access.

Under the proposed rule, the credit union would be required to provide branch details including how many service facilities are in the area, whether the credit union participates in shared branching, the number of ATMs (owned and shared), any new branches planned, use of electronic delivery channels, and how the credit union will sign up low- and moderate-income individuals. By eliminating the need for providing granular details about the branch structure, the NCUA hopes to encourage applicants to spend more time determining how to best meet the evolving needs of their members and considering innovative service delivery channels like virtual banking.

Standardized Fillable Application for Community Charter Requests

The proposed rule would require the use of a fillable, standardized application for all community charter actions. The standardized application should better focus credit unions on critical requirements and ensure uniform NCUA reviews across applications. The use of the standardized application form should reduce the number of follow-up requests from the NCUA for additional information. The proposed form is available for review within the Regulations.gov docket for this notice of proposed rulemaking.

Requirements for Community-Based State-Chartered Credit Unions Converting to an FCU

The proposed rule would amend the Manual’s business and marketing plan requirements for FISCUs that already serve the community applying to become a federal community charter. In place of the plan’s current requirements,[3] the proposed rule would require a FISCU to submit a statement addressing the following topics:

  1. Does the existing community consist of a portion of a Core Based Statistical area or a Combined Statistical area? If so, please explain the credit union’s basis for selecting its service area.
  2. Describe products and services you offer or plan to offer to low- and moderate-income and underserved members.
  3. How will you market to the low-and moderate-income, and underserved (economically distressed) people, and those with unique needs, in the community?

This proposed change would NOT apply to single or multiple common bond FISCUs converting to an FCU community charter. These credit unions would have to submit a business and marketing plan. This change would also not apply to non-federally insured credit unions.

Groups Sharing a Common Bond with Community Areas

The Board is also proposing a targeted addition to the affinity groups eligible for membership in community-based FCUs. The manual currently defines an affinity as a relationship on which a community charter is based outlining four types of affinity groups eligible for membership in FCUs serving communities or rural districts, primarily persons who live, work, worship, or attend school in the community or rural district.[4]

To address the increasing trends in telecommuting and decentralized workspaces, the Board is proposing to add a fifth affinity to include a paid employee for a legal entity headquartered in the community, neighborhood, or rural district. The NCUA believes this proposed change will help FCUs adapt to serve everyone with ties to a community by providing employees access to a community credit union with which they have a bond through their employer, even if they do not physically work in the well-defined local community or rural district.

Eligibility of Immediate Family Members of Decedents

The NCUA is also proposing an update to the groups of persons who may join an FCU based on a common bond with its members or the FCU. Under the current options available for FCUs to enroll secondary members, immediate family or household members of decedents are not eligible for membership unless the person was a spouse of a person who died while within the field of membership of the credit union.

The proposal would amend the Manual to update the definition of secondary members for each common bond type to include every member of a decedent’s immediate family or household for a 6-month period following the decedent’s passing.

Updated References for Review of Prospective Management and Officials

Finally, the proposed rule would make a technical clarification and correction to the Manual provision regarding the agency’s evaluation and disapproval of directors and other management officials for applicants for NCUSIF coverage. The goal of the change is to reduce confusion for applicants and provide a clearer explanation of which authorities govern this review process.

Comments

The NCUA Board is seeking feedback on all elements of the proposed rule. Comments can be submitted electronically via regulations.gov or via the NCUA website: https://www.ncua.gov/​regulation-supervision/​rulemakings-proposals-comment. Following the instructions for submitting comments.

[1] 12 U.S.C. 1759(b)

[2] 12 CFR 1805.101

[3] 12 U.S.C. 1771; Manual, Chapter 4, Section II

[4] 12 U.S.C 1771; Manual, Chapter 2, Section V.A.1.