Summary: LTCU 21-CU-02, NCUA’s Supervisory Priorities

Letter to Credit Unions 21-CU-02 NCUA’s 2021 Supervisory Priorities

January 2021

NCUA’s Letter to Credit Unions (LTCU) 21-CU-02 identifies the agency’s supervisory priorities for 2021. NCUA also notes that it remains committed to the extended examination cycle per the agency’s Exam Flexibility Initiative.

The LTCU lists the following 9 Supervisory Priorities for 2021:

1)    Allowance for Loan and Lease Losses (ALLL) – Because FASB delayed CECL implementation until January 2023, NCUA will no longer be assessing credit union efforts to transition to the CECL. NCUA will evaluate credit union maintenance of ALLL accounts by reviewing:

  • ALLL policies and procedures;
  • Documentation of reserving methodology, modeling assumptions & qualitative factor adjustments;
  • Adherence to generally accepted accounting principles; and
  • ALLL reviews by the Supervisory Committee or internal/external auditor.

ALLL calculations should be in accordance with FASB Accounting Standards Codification (ASC) Subtopic 450-20 (loss contingencies) and/or ASC 310-10 (loan impairment).

2)    Bank Secrecy Act/Anti-Money Laundering Compliance – BSA/AML will continue to be a focus of NCUA examiners. Federal regulators have recently updated the FFIEC Bank Secrecy Act/Anti-Money Laundering Examination Manual, issued joint statements on BSA/AML enforcement & BSA due diligence requirements for PEPs, developed rules on Exemptions from CIP requirements for premium finance loans, and released a 2020 joint fact sheet, which addressed BSA due diligence for charities and non-profits.

NCUA examiners will focus on implementing appropriate CDD & beneficial ownership procedures, proper filing of SARs and CTRs, and reviews of bi-weekly 314(a) information requests. For Additional resources, see NCUA’s Bank Secrecy Act Resources webpage.

3)    Coronavirus Aid, Relief and Economic Security Act – The March 2020 CARES Act & the December 2020 Consolidated Appropriations Act provided relief to consumers affected by the pandemic.  NCUA examiners will continue to review compliance with:

  • the CARES Act suspension of requirements to categorize certain loan modifications as troubled debt restructurings or TDRs (through January 1, 2022)
  • CARES Act provisions related to modifications, credit reporting, forbearances, and foreclosures

For more information, see NCUA LTCU 20-CU-07, Summary of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and NCUA LTCU 21-CU-01, Summary of the Consolidated Appropriations Act, 2021.

4)    Consumer Financial Protection – For FCUs, NCUA will examine for consumer compliance during every exam. NCUA examiners will focus on Fair Lending and areas related to the COVID-19 pandemic with review including areas such as:

  • board and management oversight
  • policies and procedures
  • training, monitoring and corrective action
  • member complaint response

5)    Credit Risk Management – NCUA will not criticize credit union efforts to provide prudent relief for borrowers when that relief is provided in a reasonable manner with proper controls and management oversight. NCUA examiners will review credit union loan underwriting standards and credit risk-management procedures, focusing on adjustments made to lending programs to address borrowers facing financial hardship because of the COVID-19 pandemic.

NCUA examiners will review policies that address the use of loan workout strategies, risk-management practices, and new strategies implemented to provide relief to borrowers affected by the pandemic, with attention pard to controls, reporting, tracking of the programs, and credit union awareness of potential impact of relief efforts on their capital ratios and soundness.  For more information, see:

 

6)    Information Systems and Assurance (Cybersecurity) – Credit union cyber hygiene and information security will remain a priority for NCUA in 2021. As noted in LTCU 20-CU-22, NCUA’s 2020 Updated Supervisory Priorities, NCUA has moved away from its use of ACET maturity assessments and will be implementing the Information Technology Risk Examination for Credit Unions (InTREx-CU) which is intended to harmonize the IT and cybersecurity examination procedures used by federal & state bank regulators.

As InTREx-CU is deployed in 2021, ACET will become a self-assessment resource for credit unions. More information is available on NCUA’s Cybersecurity Resources.

7)    LIBOR Transition – Credit unions should be preparing for the expected discontinuation of the London Inter-bank Offered Rate (LIBOR) interest rate benchmark. Credit unions’ transition plans should include risk-management processes to identify and mitigate their LIBOR transition risks.

NCUA examiners will continue to educate credit unions on the transition and assess exposure to LIBOR and the safety and soundness of credit unions’ plans to migrate to an alternative reference rate. More information is available from NCUA’s LIBOR Assessment Workbook and the July 2020 Interagency Statement.

8)   Liquidity Risk – Anticipating continued stress on credit union balance sheets resulting from the Pandemic related economic dislocation, NCUA examiners will focus on credit union liquidity risk management. A robust liquidity risk management plan will address:

  • Sudden and significant share outflows
  • A broad range of possible interest rate paths to identify the potential variability in loan and securities cash flows
  • Changes in cash flow projections for relevant factors, such as a change in prepayment speeds, decay rates, share compositions and volumes
  • The effects of loan payment forbearance, loan delinquencies, projected credit losses and loan modifications on liquidity and cash flow forecasting
  • The decline in credit quality and resulting market value of assets as it relates to external borrowing capacity
  • Stress scenarios that include the reduction of available credit lines to ensure an adequate mix of diversified funding sources

9)    Serving Hemp-Related Businesses – NCUA continues to encourage credit unions to consider whether they are capable of serving hemp-related businesses while reminding credit unions of the complexity of such relationships. See:

Modernization Updates

  • NCUA will broaden rollout of MERIT in the second half of 2021
  • The NCUA is incorporating the use of an Exam Planning Questionnaire into the exam planning process to provide NCUA examiners with information on certain products and services, significant events, insider activities, and fraud awareness. NCUA examiners will provide the questionnaire to credit unions in advance of a scheduled exam and will use the responses to refine the exam scope, increase offsite-monitoring capabilities, and incorporate efficiencies to the exam.
Letter to Credit Unions 21-CU-01 Summary of the Consolidated Appropriations Act 2021

January 2021

NCUA’s LTCU 21-CU-01 discusses the provisions of the Consolidated Appropriations Act, 2021 (CAA 2021) that directly affect the credit union system, including:

  • Central Liquidity Facility

The CAA 2021 extended each of the CLF CARES Act provisions described below through December 31, 2021. The CLF’s borrowing authority stands at $32.9b and 4,105 FICUs (80%) now have access to the CLF. The CARES Act:

  • Increased the CLF borrowing multiplier from 12 to 16
  • Allows Agent members to only subscribe to stock for a subset of members
  • Allows corporate credit unions to access the CLF for their own liquidity needs
  • Removed the phrase “the Board shall not approve an application for credit the intent of which is to expand credit union portfolios” from the borrowing process

The April 13, 2020 NCUA interim final rule made additional enhancements to the CLF. See LTCUs 20-CU-08 and 20-CU-14. 

  • Troubled Debt Restructuring

The CAA 2021 extended the CARES Act § 4013 suspension of troubled debt classifications of loan modifications related to the pandemic through January 2, 2022.

  • CECL Delay Extension

The CAA 2021 financial institution exemption from CECL through January 1, 2022. FICUs are not required to comply with CECL until January 1, 2023.

  • Paycheck Protection Program

The CAA 2021 made several changes to the PPP program, including:

    • Additional $284.5b in funding for 1st & 2nd second rounds of forgivable loans
    • Additional $15 billion for guaranteeing loans made by CDFIs & MDIs
    • Additional $15 billion for guaranteeing loans made by institutions < $10b 
  • Community Development Revolving Loan Fund

The CAA 2021 authorizes $1.5m for the NCUA’s CDRLF until September 30, 2022, for technical assistance to low-income credit unions.

  • Community Development Financial Institutions

The CAA 2021 authorizes $12b in COVID-19 relief funding for CDFIs predominantly serving minority communities (with about 1/3 set aside for institutions < $2b in assets) and provides the CDFI Fund with $270m in supplemental funding.

Regulatory Alert 21-RA-01 CFPB Amends Ability-to-Repay/QM Rule under TILA

January 2021

The CFPB has issued 2 final rules amending the Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule) in Regulation Z. Both final rules below are effective March 1, 2021:

  • The General QM Final Rulereplaces the existing 43% debt-to-income (DTI) ratio limit with price-based thresholds with a compliance date of July 1, 2021
  • The Seasoned QM Final Rulecreates a new category of qualified mortgage

For more information, the CFPB provides a compliance guide and other resources.

  • General QM Final Rule Amendment (12 CFR 1026.43)

Amendments to the QM rule remove the existing 43% DTI ratio limit and replaces it with a price-based limit and also remove Appendix Q.

The final rule retains the requirement to consider and verify the debt and income used to calculate a borrower’s DTI ratio or residual income as well as the existing product-feature and underwriting requirements, and limits on points and fees.

Price-Based Limits Replaces the 43% DTI

To qualify as a General QM loan pursuant to §1026.43(e)(2)(vi), the APR may not exceed the average prime offer rate (APOR) for a comparable transaction by more than the rule’s applicable threshold as of the date the interest rate is set. The thresholds are:

Lien Position

Loan Amount

Threshold
1st Greater than or equal to $110,260 2.25%
1st Greater than or equal to $66,156 but < $110,260 3.5%
1st Less than $66,156 6.5%
Subordinate Greater than or equal to $66,156 3.5%
Subordinate Less than $66,156 6.5%

 

For first-lien loans secured by a manufactured home, the pricing thresholds are:

Loan amount < $110,260 Threshold 6.5%
Loan amount > $110,260 Threshold 2.25%

 

Consider and Verify Requirements (12 CFR 1026.43(e), (f)):

Lenders must consider the borrower’s current or reasonably expected income, assets, debt, alimony, child support, and monthly DTI ratio or residual income in the ATR determination. Written policies and procedures for evaluating ATR factors must be developed and maintained, and documentation for each loan showing how these factors were considered must be kept.

Lenders must verify the borrower’s income and debt consistent with the current general ATR standard, using reasonably reliable third-party records and reasonable methods and criteria.

  • The Seasoned QM

Section 1026.43(e)(7) of the final rule creates the “Seasoned QM.” This subset of Qualified Mortgages have a safe harbor from ATR liability at the end of a 36-month seasoning period if the loan meets certain criteria. To be eligible, the loan must:

  • Be secured by a 1st lien
  • Have a fixed rate, with fully amortizing payments and no balloon payment
  • Have a term of 30 years or less
  • Keep total points and fees within specified limits
  • Not be defined as a Reg Z high-cost mortgage

In addition, Seasoned QMs generally may not be subject to commitment to be acquired by another person at time of consummation and must be held in portfolio until the end of the seasoning period. There are a few exceptions spelled out in the rule.

Performance Requirements

Seasoned QMs are subject to certain benchmarks tied to performance. Pursuant to          § 1026.43(e)(7)(ii)) & (iv)(A)(3)(ii)):

  • At the ends of the seasoning period (36 months) loan can have no more than 2 delinquencies of 30 or more days and no delinquencies of 60 or more days
  • The lender may accept deficient payments, within a payment tolerance of $50, on up to 3 occasions during the seasoning period without triggering a delinquency.
Regulatory Alert 20-RA-09 2021 Exemption Thresholds Adjustments Under the Truth in Lending Act (Regulation Z) and the Consumer Leasing Act

December 2020

NCUA’s Regulatory Alert notifies credit unions of the three annual exemption thresholds for 2021 related to 1) special appraisal requirements for higher-priced mortgage loans; and 2) consumer credit; and 3) lease transactions. The 2021 thresholds will be the same as the 2020 thresholds.

The exemption threshold for 2021 will remain at $27,200 based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) in effect as of 6/1/2020.

The exemption threshold for 2021 will remain at $58,300 based on the CPI-W in effect as of 6/1/2020.

CFPB Summary re: Statement of Policy on Applications for Early Termination of Consent Orders

12 CFR Chapter X

The Consumer Financial Protection Bureau

Prepared by the Legislative and Regulatory Affairs Department

November 2020

Dodd Frank provides that the Consumer Financial Protection Bureau (CFPB) may enter into administrative consent orders where the Bureau has identified violations of Federal consumer financial law.  The Bureau acknowledges that there may be exceptional circumstances where it is appropriate to terminate a consent order before its original expiration date.  The Bureau has issued this policy statement setting forth a process by which an entity subject to a consent order may apply for early termination and articulates the standard that the Bureau intends to use when evaluating early termination applications.

The policy statement became effective on October 8, 2020 and can be found here.

Summary:

Under Dodd Frank, where the Bureau has found that an entity has violated Federal consumer financial law, the Bureau has the authority to settle claims against the entity by entering into an Administrative Consent Order.  Consent orders describe the Bureau’s findings/conclusions concerning the violations and generally impose injunctive relief, monetary relief such as redress and civil money penalties, and reporting, recordkeeping, and cooperation requirements.  Consent orders are negotiated by the Bureau and the entity (or entities) and generally have a five year term.  The Bureau believes that in most instances, the consent order should run its full, negotiated term.  However, the Bureau believes there may be exceptional circumstances when early termination of a consent order may be warranted.

The Bureau’s early termination policy sets forth a process by which entities subject to a consent order may apply for early termination.  The policy also lays out standards the Bureau intends to use when determining if early termination of a consent order is appropriate.  The Bureau notes that the policy is not binding on the Bureau and the Bureau’s Director intends to retain complete discretion and sole authority to terminate consent orders.

Applications for Early Termination

The Bureau intends to grant application for early termination of consent orders if it determines, in its sole discretion, that:

  • The entity meets all of the eligibility criteria set forth below;
  • The entity has complied with the terms and conditions of the consent order and
  • The entity’s compliance position is “satisfactory” in the institutional product line (IPL) or compliance area (e.g. fair lending) for which the order was issued.

When an entity applies for termination, its application should demonstrate that these conditions are satisfied:

  • The entity must be subject to a consent order the Bureau issued using its authority to conduct administrative adjudication proceedings.
  • In order to protect consumers from unwarranted early terminations and preserve the resources of potential applicants and the Bureau, the Bureau only intends to consider applications for early termination under this policy from entities that meet certain threshold eligibility criteria. That criteria is as follows:
  • The entity must be subject to a consent order the Bureau issued using its authority to conduct administrative adjudication proceedings. This policy does not apply to settlements approved and ordered by a court, which can only be terminated early by court order.  This policy does not apply to court orders that result from litigation.
  • Only entities are eligible to apply for early termination under this policy. Individuals are not eligible. The Bureau only intends to grant early termination where, among other things, an entity demonstrates that its compliance management system is “satisfactory” in the institutional product line in which the consent order was issued.
  • Entities may not apply for early termination under this policy within the first year after the entry of the consent order or at until at least six months after all compliance and redress plans required under the consent order been fully implemented, whichever is later.
  • Entities are not eligible for early termination when the consent order imposes a ban on participating in a certain industry when the consent order issue involves violations of an earlier Bureau order or when there has been any criminal related to the violations found in the consent order.
  • Finally, absent extraordinary circumstances, the Bureau does not intend to consider more than one request from an entity for termination of the same consent order. This eligibility requirement is intended to incentivize entities to submit complete applications at an appropriate time following the issuance of a consent order and to discourage serial requests that could pose a resource challenge for the Bureau.

Compliance with the consent order

When an entity applies for early termination, its application should demonstrate its full compliance with the consent order, including whether the entity has (when required) corrected violations of Federal consumer financial law; paid redress, civil money penalties or other monetary relief; adopted appropriate policies and procedures to ensure future compliance; submitted adequate reports; and maintained required records.

The Bureau intends to expeditiously review the entity’s compliance with the consent order and conduct follow up work as needed.  The Bureau generally intends to complete this compliance review within six months of receiving an application that the Bureau determines is complete, although the Bureau retains discretion over when to conduct the review to determine compliance with consent order provisions given the Bureau’s other supervisory/enforcement priorities.

The entity shall also demonstrate that is compliance management system for the IPL or compliance area at issue under the order is “satisfactory,” or the equivalent of a “2” rating under the Uniform Interagency Consumer Compliance Rating System.

Process for Submission and Review of Early Termination Applications

Unless otherwise directed in writing by the Bureau, an entity’s termination application should be submitted to the Bureau point of contact identified in the “Notices” section of the consent order.  Prior to submitting an application for order termination, an entity should contact the Bureau point of contact established in the consent order for additional guidance on the form of such a request.

In general, the entity’s application should demonstrate that the entity has satisfied all of the conditions set forth above.  The application may include exhibits and may reference prior written submissions to the Bureau as appropriate.  Any factual assertions an entity makes in its application should be made under oath by someone with personal knowledge of such facts.  The Bureau may request additional information from the entity when evaluating the application.  The Bureau may also consider any other information available to it regarding the entity, including information obtained from other government agencies or through other supervisory and enforcement activities involving the entity.

Bureau staff will make recommendations to the Bureau’s Director regarding whether to grant applications for early termination.  The Bureau’s Director intends to retain complete discretion and sole authority to terminate consent orders. The Director’s orders granting or denying termination applications will be posted on the Bureau’s online administrative docket and distributed to the entity.  Prior to the Director’s decision, an entity may withdraw its application at any time.

12 CFR Part 1074 (CFPB)

Prepared by NASCUS Legislative and Regulatory Affairs Division

November 2020

The OCC, Board, FDIC, NCUA and Bureau (collectively, “the agencies”) are inviting comment on a proposed rule that would codify the Interagency Statement Clarifying the Role of Supervisory Guidance issued by the agencies on September 11, 2018.   The proposed rule is intended to confirm that the agencies will continue to follow and respect the limits of administrative law in carrying out their supervisory responsibilities.  The 2018 statement reiterated well-established law by stating that, unlike a law or regulation, supervisory guidance does not have the force and effect of law.  As such, supervisory guidance does not create binding legal obligations for the public.  The proposal would also clarify that the 2018 Statement, as amended, is binding on the agencies.

Comments are due by January 4, 2021.  The proposed rule can be found here.

Summary 

The agencies recognize the important distinction between issuances that serve to implement acts of Congress (known as “regulations” or “legislative rules”) and non-binding supervisory guidance.  Regulations create binding legal obligations.  Supervisory guidance is issued by an agency to “advise the public prospectively of the manner in which the agency proposes to exercise a discretionary power” and does not create binding legal obligations.

The agencies issued the Interagency Statement Clarifying the Role of Supervisory Guidance in 2018 to explain the role of supervisory guidance and the agencies’ approach to supervisory guidance.  The Statement noted that supervisory guidance outlines the agencies’ supervisory expectations or priorities and articulates the agencies’ general views regarding appropriate practices for a given subject area.  Supervisory guidance often provides examples of practices that mitigate risks, or that the agencies generally consider to be consistent with safety and soundness standards or other applicable laws and regulations, including those designed to protect consumers.

The 2018 Statement reiterates existing law and reaffirms the agencies’ understanding that supervisory guidance does not creating binding, enforceable legal obligations.  The Statement also reaffirms that the agencies do not issue supervisory criticisms for “violations” of supervisory guidance and describes the appropriate use of supervisory guidance by the agencies.  The agencies also expressed the following intentions within the Statement:

  • Agencies will limit the number of numerical thresholds in guidance;
  • Agencies will reduce the issuance of multiple supervisory guidance documents on the same topic;
  • Agencies will continue efforts to make the role of supervisory guidance clear in communications to examiners and supervised institutions; and
  • Agencies encourage supervised institutions to discuss their concerns about supervisory guidance with their appropriate agency contact.

This proposal is being issued in response to a petition that requested the agencies codify the 2018 interagency statement as well as provide additional clarification concerning questions that have arisen since the statement was issued.

Request for Comment

The agencies request comment on the following questions:

  • Questions specific to communications regarding the supervisory guidance
    • Should examiners reference supervisory guidance to provide examples of safe and sound conduct, appropriate consumer protection and risk management practices, and other actions for addressing compliance with laws or regulations when criticizing (through the issuance of matters requiring attention, matters requiring immediate attention, matters requiring board attention, documents of resolution, supervisory recommendations or otherwise) a supervised financial institution?
    • Are there specific situations where providing such examples would not be appropriate?
    • Is it sufficiently clear what types of agency communications constitute supervisory guidance? If not, what steps could the agencies take to clarify this?
    • Are there any additional clarifications to the 2018 Statement that would be helpful?
    • Are there other aspects of the proposal where you would like to offer comment?
  • Questions specific to the plain language requirements re: Section 722 of Gramm-Leach Bliley Act
    • Have the agencies organized the material to suit your needs? If not, how could they present the proposed rule more clearly?
    • Are the requirements in the proposed rule clearly stated? If not, how could the proposed rule be more clearly stated?
    • Do the regulations contain technical language or jargon that is not clear? If so, which language requires clarification?
    • Would a different format (grouping and order of sections, use of headings, paragraphing) make the regulation easier to understand? If so, what changes would achieve that?
    • Would more, but shorter, sections be better? If so, which sections should be changed?
    • What other changes can the agencies incorporate to make the regulation easier to understand?

NASCUS Current State of FCU FOM Webinar (Members only)

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CFPB Summary re: CARD Act Rules Review Pursuant to the Regulatory Flexibility Act; Request for Information Regarding consumer Credit Card Market

Docket No. CFPB 2020-0027

The Consumer Financial Protection Bureau

Prepared by the Legislative and Regulatory Affairs Department

October 2020

The Consumer Financial Protection Bureau (CFPB) is requesting comment on two related but separate reviews. First, the Bureau is conducting a review of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act).  As part of this review, the Bureau is seeking comment on the economic impact of the CARD Act Rules on small entities.  Information gathered for this review will be used to determine whether the 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.  Additionally, the Bureau is conducting a review of the consumer credit card market, within the limits of its existing resources available for reporting purposes, pursuant to the CARD Act, and is seeking comment on a number of aspects of the consumer credit card market.

Comments are due by October 27, 2020.  The request for information can be found here.

Summary:

The CARD Act was signed into law in May 2009 and was intended to “establish fair and transparent practices related to the extension of credit” in the credit card market.

Regulatory Flexibility Action (RFA) Section 610 Review

The Regulatory Flexibility Act (RFA) requires each agency to consider the effect of certain rules it promulgates on small entities.  Section 610 of the RFA provides that each agency shall publish in the Federal Register a plan for the periodic review of the rules issued by the agency which have or will have a significant economic impact upon a substantial number of small entities.

According to Section 610, 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, the Bureau will 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.

Regarding the RFA Section 610 review, the Bureau asked the public to comment on the following:

  • The current scale of the economic impacts of the rules on small entities and of their major components on small entities, including impacts on reporting, recordkeeping, and other compliance requirements.
  • Whether and how those impacts on small entities could be reduced, consistent with the stated objectives of applicable statutes and the rules
  • Current information relevant to the factors that the Bureau is required to consider in completing a Section 610 review under RFA, as directed above.

Where possible, the Bureau ask that commenters please submit detailed comments, data, and other information to support any submitted positions.

CARD Act Section 502(a) Review

Section 502(a) of the CARD Act requires the Bureau to conduct a review, within the limits of its existing resources available for reporting purposes, of the consumer credit card market every two years.  In addition, the Bureau is instructed to seek public comment as a part of this review.  The Bureau has issued four reports in relation to this review and will use the comments received from this Request for Information (RFI) to inform its next review.

The Bureau invites members of the public, including consumers, credit card issuers, industry analysts, consumer groups, and other interested persons to submit information and other comments relevant to the issues expressly identified, as well as any information they believe is relevant to a review of the credit card market.

The public is encouraged to respond generally to any or all of the questions below regarding the topic areas and are asked to indicate in their comments on which topic areas or questions they are commenting.

The terms of credit card agreements and practices of credit card issuers

  • How have the substantive terms and conditions of credit card agreements or the length and complexity of such agreements changed over the past two years?
  • How have issuers changed their pricing, marketing, underwriting or other practices?
  • How are the terms of, and practices related to, major supplementary credit card features (such as credit card rewards, deferred interest promotions, balance transfers and cash advances) evolving?
  • How have issuers changed their practices related to deferment, forbearance, or other forms of debt relief or assistance offered to consumers?
  • How have creditors as well as third-party collectors changed their practices over the past two years of collecting on delinquent and charged-off credit card debt?
  • Has the use of electronic communication (e.g. email or SMS) by creditors and debt collectors in connection with credit card debt grown or otherwise evolved?
  • How are the practices of for-profit debt settlement companies changing and what trends are occurring in the debt settlement industry? How are creditors and non-profit credit counseling agencies responding to these changes and trends?

The effectiveness of disclosure of terms, fees, and other expenses of credit card plans

  • How effective are current disclosures of rates, fees, and other cost terms of credit card accounts in conveying to consumers the costs of credit card plans?
  • What further improvements in disclosure, if any, would benefit consumers and what costs would card issuers or others incur in providing such disclosures?
  • How well are current credit card disclosure rules and practices adapted to the digital environment? What adaptations to credit card disclosure regimes in the digital environment would better serve consumers or reduce industry compliance burden?

The adequacy of protections against unfair or deceptive acts or practices relating to credit cards plans

  • What unfair, deceptive, or abusive acts and practices exist in the credit card market? How prevalent are these acts and practices and what effect do they have? How might any such conduct be prevented and at what cost?

The cost and availability of consumer credit cards

  • How have the cost and availability of consumer credit cards (including with respect to non-prime borrowers) changed since the Bureau reported on the credit card market in 2019? What is responsible for changes (or absence of changes) in costs and availability? Has the impact of the CARD Act on cost and availability changed over the past two years?
  • How, if at all, are the characteristics of consumers with lower credit scores changing? How are groups of consumers in different score tiers faring in the market? How do other factors relating to consumer demographics or financial lives affect consumers’ ability to successfully obtain and use card credit?

The safety and soundness of credit card issuers

  • How is the credit cycle evolving? What, if any, safety, and soundness risks are present or growing in this market, and which entities are disproportionately affected by these risks?
  • How, if at all, do these safety and soundness risks to entities relate to long-term indebtedness on the part of some consumers, or changes in consumers’ ability to manage and pay their debts?
  • Has the impact of the CARD Act on safety and soundness changed over the past two years?

The use of risk-based pricing for consumer credit cards

  • How has the use of risk-based pricing for consumer credit cards changed since the Bureau reported on the credit card market in 2019? What has driven those changes or lack of changes? Has the impact of the CARD Act on risk-based pricing changed over the past two years?
  • How have CARD Act provisions relating to risk-based pricing impacted (positively or negatively) the evolution of practices in this market?

Consumer credit card product innovation

  • How has credit card product innovation changed since the Bureau reported on the credit card market in 2019? What has driven those changes or lack of changes? Has the impact of the CARD Act on product innovation changed over the past two years?
  • How have broader innovations in finance, such as (but not limited to) new products and entrants, evolving digital tools, greater availability of and new applications for consumer data, and new technological tools (like machine learning), impacted the consumer credit card market, either directly or indirectly? In what ways do CARD Act provisions or its implementing regulations encourage or discourage innovation? In what ways do innovations increase or decrease the impact of certain CARD Act provisions or change the nature of those impacts?

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Prepared by NASCUS Legislative & Regulatory Affairs Department
September 2020

NCUA and the other federal banking agencies (FBAs) have issued a joint statement updating their guidance regarding how they evaluate enforcement actions that are required by statute when financial institutions fail to meet BSA/AML/CFT obligations.

The statement:

  • clarifies that isolated or technical violations or deficiencies are generally not considered the kinds of problems that would result in an enforcement action
  • addresses how the agencies evaluate violations of individual BSA components (the Pillars) including examples of violations that would and would not result in a cease and desist order
  • describes how the agencies incorporate CDD and recordkeeping requirements into evaluation of the internal controls Pillar of the BSA compliance program

Summary

Section 8(s) of the FDIA and section 206(q) of the FCUA requires FDIC and NCUA (respectively) examination programs include a review of the institution’s BSA/AML compliance program and that reports of examination describe any problem with the program. The statutes require the agencies issue a cease and desist if an institution has failed to establish and maintain a BSA/AML compliance program or has failed to correct any problem with the program previously reported to the institution by the agency.

Communicating Supervisory Concerns about BSA/AML Program

If FDIC or NCUA identify any supervisory concerns relating to an institution’s BSA/AML compliance program, the agency may communicate those concerns by various formal and informal means including:

  • informal discussions between examiners and management during the examination or the supervisory process
  • formal discussions between examiners and the board of directors as part of or following an examination, or as part of the ongoing supervision processes
  • written communications from examiners or the Agency to the board of directors or senior management communicating concerns regarding the BSA program
  • inclusion of a finding in the Report of Examination (ROE) or in other formal communications from an Agency to the institution’s board or management

The Joint Statement reiterates that BSA program deficiencies must be identified in a ROE or other written document reported to an institution’s board of directors or senior management as a violation of law or a matter that must be corrected. Certain isolated or technical violations of law and other issues or suggestions for improvement may be communicated through other means.

Program Failure Rising to Cease and Desist

The agencies provide the following examples of program violations that would rise to the level of the issuance of a cease and desist order:

  • The institution fails to have a written BSA compliance program, including a customer identification program, that adequately covers the required program components or pillars
  • The institution fails to implement a BSA compliance program that adequately covers the required program components or pillars
  • The institution has defects in its BSA compliance program in one or more program components or pillars that indicate that either the written BSA/AML compliance program or its implementation is not effective, for example where the deficiencies are coupled with other aggravating factors such as:
    • highly suspicious activity creating a potential for significant money laundering, terrorist financing, or other illicit financial transactions
    • patterns of structuring to evade reporting requirements
    • significant insider complicity
    • systemic failures to file CTRs, SARs, or other required BSA reports

The agencies note that other types of deficiencies, including a deficiency in implementing a Pillar may not result in a cease and desist, unless the deficiencies are so severe they render the BSA program ineffective. The Joint Statement provides as an example an institution with deficiencies in its procedures for providing required BSA training could be subject to examiner criticism and/or supervisory action other than the issuance of a cease and desist order, unless the training program deficiencies are so severe or significant that the overall BSA program, taken as a whole, is not effective.

Failure to correct a previously reported problem with the BSA Program

The Joint Statement notes the agencies shall issue cease and desist orders when an institution fails to correct a BSA program problem previously reported to the institution by the agency. The 2 important determinations if a cease and desist would be issued are:

  • The previously reported “problem” should involve substantive deficiencies in one or more of the required components or pillars of the BSA program; and
  • To be “previously reported” the deficiency should have been communicated to the institution’s board or senior management in a ROE or other supervisory communication as a violation of law or regulation that is not isolated or technical, or as a matter that must be corrected.

The previously reported problem should be substantially the same as those previously reported to the institution to result in a cease and desist pursuant to this policy. The agencies acknowledge that certain types of problems with an institution’s BSA/AML compliance program may not be fully correctable before the next examination or within the planned timeframes for corrective actions due to unanticipated issues/developments. The Joint Statements notes that in such cases the agency need not issue a cease and desist if it determines the institution has made acceptable substantial progress toward correcting the problem.

Enforcement Actions for Other BSA/AML Requirements

The agencies may take formal or informal enforcement actions to address violations of BSA requirements other than the BSA compliance program or the Pillars such as CDD, beneficial ownership, foreign correspondent banking, and CTR/SAR requirements. Consistent with the treatment of program violations, isolated or technical violations of these non-program requirements are generally would not result in enforcement actions.

Suspicious Activity Reporting Requirements

The agencies will cite a violation of the SAR regulations, and will take appropriate supervisory action, if the institution’s failure to file SARs evidences a systemic breakdown in its policies, procedures, or processes to identify and research suspicious activity, involves a pattern or practice of noncompliance with the filing requirement, or represents a significant or egregious situation.

Other BSA Reporting and Recordkeeping Requirements

Finally, the Joint Statement notes other BSA reporting and recordkeeping requirements including requirements applicable to cash and monetary instrument transactions and funds transfers, CTR filing and exemption rules, due diligence, certification, and other requirements that may be applicable to customer accounts and foreign correspondent and private banking accounts. These additional regulatory requirements are evaluated as a part of the internal control component or Pillar of the institution’s BSA/AML compliance program.

Prepared by NASCUS Legislative & Regulatory Affairs Department
September 2020

FinCEN has issued a final rule applying BSA compliance program requirements to privately insured credit unions (PICUs) and other financial institutions without a functional federal regulator.  The Final Rule requires minimum standards for anti-money laundering programs for PICUs and extends customer identification program requirements and beneficial ownership requirements to those banks not already subject to these requirements.

NASCUS Note: As a practical matter, state regulators had already required under state rules that PICUs comply with the BSA in the same manner and to the same extent as all other covered banks and credit unions.

The Final Rule may be read here. The rule is effective November 16, 2020. 

Summary

The final rule formally  extends the following BSA/AML requirements to privately insured credit unions and other entities lacking a functional federal regulator.

AML Programs – Section 352 of the USA PATRIOT Act requires financial institutions to establish AML programs that, at a minimum, include:

  1. the development of internal policies, procedures, and controls
  2. the designation of a compliance officer
  3. an ongoing employee training program
  4. an independent audit function to test programs

CIP – Section 326 of the USA PATRIOT Act requires FinCEN to prescribe Customer Identification Program (CIP) regulations requiring financial institutions to establish procedures for account opening that:

  1. verify the identity of any person seeking to open an account
  2. provide for maintaining records of the information used to verify the member’s/customer’s identity, including name, address, and other identifying information
  3. determine whether the person appears on government lists of known or suspected terrorists or terrorist organizations

Correspondent Accounts – Section 312 of the USA PATRIOT Act requires financial institutions that administer correspondent or a private banking accounts in the United States for a non-U.S. person to subject the accounts to certain AML measures designed

to detect and report possible money laundering through the accounts. Section 5318(i)(2) of the BSA specifies additional standards for correspondent accounts maintained for certain foreign banks and sets minimum due diligence requirements for private banking accounts for non-U.S. persons.  Specifically, covered financial institution must:

  1. ascertain the identity of the beneficial owners of, and sources of funds deposited into, private banking accounts
  2. conduct enhanced scrutiny of private banking accounts related to senior foreign political figures and their families and associates

Joint Statement Summary

Joint Statement on Additional Loan Accommodations Related to COVID-19

August 2020

The Federal Financial Institutions Examination Council (FFIEC) has issued a Joint Statement to provide prudent risk management and consumer protection principles for financial institutions to consider while working with borrowers as loans near the end of initial loan accommodation periods  applicable during the COVID-19 pandemic. The FFIEC intends the principles in the joint statement to be tailored to a financial institution’s size, complexity, and loan portfolio risk profile, as well as the industry and business focus of its customers/members.

Background

To address the impact of the COVID-19 crisis, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) providing several forms of relief to businesses and borrowers. In addition, some states and localities have provided similar credit accommodations and many financial institutions have voluntarily offered other credit accommodations to their borrowers.

At issue is that some borrowers will be unable to meet their obligations at the end of these initial COVID-19 related accommodations due to continuing financial challenges.  Furthermore, some financial institutions will have difficulty assessing credit risk going forward due to difficulty in distinguishing between the unique impact of COVID, the impact of government intervention programs, and lasting financial deterioration.

The FFIEC encourages institutions to consider prudent accommodation options that can benefit borrowers while facilitating the institution’s ability to collect on the loan.

FFIEC identifies the following principles to guide institutions in working with borrowers as loans near the end of the initial accommodation period:

  • Prudent Risk Management Practices

Prudent risk management means measuring and monitoring the credit risks of loans that receive accommodations to identify any deterioration in credit worthiness and potential loss exposure in a timely manner. This may include applying and adjusting loan risk ratings or grades and making appropriate accrual status decisions on loans affected by the pandemic. The FFIEC notes that following a loan accommodation, institutions generally re-evaluate the loan’s risk ratings based on the borrower’s current debt level, current financial condition, repayment ability, and collateral.  A reasonable accommodation need not result in an adverse risk rating solely because of a decline in the value of underlying collateral.

When executing accommodations, institutions should provide borrowers clear, accurate, and timely information regarding the accommodation.

  • Well-Structured and Sustainable Accommodations

When a borrower continues to experience financial challenges after an initial accommodation, it may be prudent to consider additional accommodation options to mitigate potential losses for both the borrower and the institution. A well designed and effective accommodation will be based on an evaluation of how the borrower has been affected by financial hardship and the potential for future performance.

 

The decision to offer additional accommodations to a borrower should be based on the risk assessment and potential collectability of the specific credit. For both consumer and commercial credit, the FFIEC notes that such an evaluation typically includes assessing:

  • the borrower’s financial condition and repayment capacity
  • whether conditions have affected collateral values or the strength of guarantees

For commercial credits, this would also include:

  • evaluating both actual and projected cash flows of a borrower’s business

Because the pandemic may have a long-term adverse effect on a borrower’s future earnings, underwriting decisions may have to rely more heavily on projected financials in the absence of traditional documentation.

  • Consumer Protection

The FFIEC Statement includes the following principles for effective consumer compliance risk management:

  1. Provide accommodation options that are affordable and sustainable
  2. Provide clear, conspicuous, and accurate communications and disclosures to inform the borrowers of the available options
  3. Provide communications and disclosures in a timely manner to allow adequate time for both the borrower and the institution to consider next steps, which may include:
  4. payment deferral, loan modification, or loan extension
  5. Base eligibility and payment terms on consistent analyses of financial condition and reasonable capacity to repay
  6. Ensure policies and procedures reflect the accommodation options offered by the institution and promote consistency with applicable laws and regulations such as:
  7. Equal Credit Opportunity Act (ECOA), Fair Credit Reporting Act (FCRA), Fair Debt Collection Practices Act (FDCPA), Fair Housing Act, Real Estate Settlement Procedures Act (RESPA), Servicemembers Civil Relief Act (SCRA), Truth in Lending Act (TILA), and UDAP rules
  8. Provide appropriate training to staff
  9. Ensure risk monitoring, audit, and consumer complaint systems are adequate to evaluate compliance with applicable laws, regulations, policies, and procedures
  10. Provide complete and accurate information to borrowers and servicers and ensure post-transfer servicing is consistent with the loan agreement

Accounting and Regulatory Reporting

The FFIEC stresses the importance of following applicable accounting and regulatory reporting requirements for all loan modifications (as the term is used in GAAP and regulatory reporting instructions), including maintaining appropriate allowances for ALLL and ACL. Appropriate methodologies for calculating ALLL or ACL consider all relevant information such as changes in borrower financial condition, collateral values, lending practices, and economic conditions resulting from the pandemic.

Institutions should review the CARES Act § 4013 (NASCUS note: See helpful OCC Guide) and the Interagency Statement on Loan Modifications & Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. The CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings (TDR) for a limited period of time to account for the effects of the pandemic and the Interagency Statement addresses accounting and regulatory reporting considerations for loan modifications, including those accounted for under Section 4013.

  • If an institution electing to account for a modification under § 4013, an additional loan modification could also be eligible if each modification is 1) related to COVID; 2) on a loan not more than 30 days past due as of 12/21/2019; and (3) executed between 3/1/2020 and the earlier of 60 days after the end of the National Emergency or 12/31/2020.
  • For non-CARES Act § 4013 loan modifications, any additional modifications should be viewed cumulatively in determining whether the additional modification is a TDR.

 

For example, if modifications for a loan are all COVID event related, in total represent short-term modifications (e.g., 6 months or less combined), and the borrower is contractually current (i.e., less than 30 days past due on all contractual payments) at the time of the subsequent modification, management may continue to presume the borrower is not experiencing financial difficulties at the time of the modification for purposes of determining TDR status, and the subsequent modification of loan terms would not be considered a TDR.

 

  • For all other subsequent loan modifications, institutions can evaluate subsequent modifications by referring to applicable regulatory reporting instructions and internal accounting policies to determine whether such modifications are accounted for as TDRs under ASC Subtopic 310-40, “Receivables-Troubled Debt Restructurings by Creditors.” For additional guidance, institutions can reference Interagency Supervisory Guidance Addressing Certain Issues Related to Troubled Debt Restructurings.

The FFIEC notes that the loan’s payment date is governed by the due date stipulated in the loan agreement and therefore past due status should be reported in accordance with the revised contractual terms of a loan.

  • Internal Control Systems

Institutions should periodically test internal controls related to managing accommodations to ensure they are functioning properly to mitigate risk. Such testing typically confirms:

  • Accommodation terms are extended with appropriate approvals
  • Accommodations offered to borrowers are presented and processed in a fair and consistent manner and comply with applicable laws and regulations
  • Servicing systems accurately consolidate balances, calculate required payments, and process billing statements for the full range of potential repayment terms that exist once the accommodation periods end
  • Staff involved in all aspects of lending, collections and making accommodations are qualified and can handle expected workloads
  • Borrower and guarantor communications, and legal documentation, are clear, accurate, and timely, and in accordance with contractual terms, policy guidelines, and federal and state laws and regulatory requirements
  • Risk rating assessments are timely and appropriately supported

The members of the FFIEC are the FRB, FDIC, NCUA OCC, CFPB, and state regulators.

 

-End-