CFPB Final Rule: Credit Card Penalty Fees (Regulation Z)

CFPB Summary: Final Rule re: Credit Card Penalty Fees

12 CFR Part 1026

The Consumer Financial Protection Bureau (CFPB) amends Regulation Z (which implements the Truth in Lending Act) to address the late fees charged by larger card issuers that (together with their affiliates) have one million or more open credit card accounts for the preceding calendar year.  The final rule adopts a late fee safe harbor threshold of $8 for large card issuers for initial and subsequent violations and provides that the annual safe harbor amount adjustments, to reflect changes in the Consumer Price Index (CPI), do not apply to the $8 safe harbor amount.

Comments are due by May 14, 2024; the final rule can be found here.

Summary:

The CFPB is amending provisions in Section 1026 of Regulation Z and its related commentary as they relate to credit card penalty fees.  Currently, under Section 1026.52, a card issuer must not impose a fee for violating the terms or other requirements of a credit card account under and open-end (not home secured) consumer credit plan (such as late payments, going over credit limits 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 or complies with the safe harbor provisions.  Section 1026.52(b) currently sets forth a safe harbor fee of $30 for the initial penalty fee and $41 for each subsequent violation of the same type that occurs during the same billing cycle or in one of the next six billing cycles.

Safe Harbor Late Fee Penalty Amounts Under the Final Rule

Acceptable Fee Amounts for Larger Card Issuers

The Bureau has determined that for Larger Card Issuers (issuers that together with their affiliates have one million or more open credit card accounts), the discretionary safe harbor dollar amounts for late fees are too high and not consistent with TILA’s statutory requirement that such fees be reasonable and proportional to the omission or violation to which the fee relates.  To address these concerns, the final rule makes the following amendments that are applicable to large card issuers:

  • The rule repeals the current safe harbor threshold amounts and adopts a late fee safe harbor dollar amount of $8 for initial and applicable subsequent violations.
  • The final rule also repeals the annual adjustments for safe harbor dollar amounts to reflect changes in the CPI (Consumer Price Index). Whether or not adjustments are necessary will be made on a periodic basis.

Acceptable Fee Amounts for Smaller Card Issuers

  • Smaller Card Issuers are defined as card issuers that (together with their affiliates) have fewer than one million open credit card accounts for the entire preceding calendar year. The revisions to Regulation Z under the final rule do not apply to smaller card issuers.  Smaller card issuers will be allowed to continue to charge the current safe harbor late fee amounts of $30 for the initial violation and $41 for each subsequent violation of the same type that occurs during the same billing cycle or in one of the next six billing cycles.  In addition, the safe harbor fee amount will continue to be adjusted annually to reflect changes in the Consumer Price Index (CPI).

Safe Harbor Threshold Amounts for Penalty Fees Other Than Late Fees

  • The final rule also adjusts the safe harbor threshold amounts for penalty fees other than late fees to $32 for the initial violation and $43 for each subsequent violation of the same type that occurs during the same cycle or in one of the next six billing cycles. This adjustment applies to ALL credit card issuers.
  • The annual Consumer Price Index adjustments will continue to apply with regard to safe harbor fees related to penalty fees other than late fees.

NCUA Risk Alert: 24-RA-01
Home Mortgage Disclosure Act Data Requirements

NASCUS Legislative and Regulatory Affairs Department
February 16, 2024

On February 15, 2024, NCUA issued Risk Alert 24-RA-01 which outlines the 2024 reporting requirements for credit unions that meet the criteria for HMDA reporting under the CFPB’s Regulation C.

A credit union must collect HMDA data for mortgage loan applications processed during 2024 and submit the data to the CFPB no later than March 3, 2025, if the credit union meets the following four criteria:

  1. The credit union had total assets above $56 million as of December 31, 2023;
  2. The credit union had a home or branch office in an MSA on December 31, 2022;
  3. The credit union originated at least one home purchase loan or refinanced a home purchase loan, secured by a first lien one-to four-unit dwelling in 2023; and
  4. The credit union originated at least 25 covered closed-end mortgage loans in 2022 and 2023 or at least 200 covered open-end lines of credit in 2022 and 2023.

Partial Reporting Exemptions

What qualifies as a partial exemption?

To assist credit unions in determining whether they qualify for a partial exemption the alert provides the following table with examples.

If a credit union originated less than 500 covered closed-end loans in 2022 and 2023 they would not be required to collect and report 26 of the 48 data points. Similarly, a credit union would not be required to collect and report the 26 data points for open-end lines of credit if they originated less than 500 covered open-end lines of credit in 2022 and 2023.

These partial exemptions operate independently of one another. Therefore, a credit union may rely on one partial exemption but not the other.

To further assist credit unions, the alert also provides a resource link to the 2023 A Guide to HMDA Reporting: Getting it Right which outlines the data points for partial exemption and those data points not covered by the exemptions.

Submission of 2023 HMDA Data

The NCUA also reminds credit unions subject to HDMA requirements for 2023, that they must submit their loan/application register (LAR) data to the CFPB using the HMDA Platform by March 1, 2024.

 

NCUA Proposed Rule: Role of Supervisory Guidance (Part 791, Subpart D)

Prepared by NASCUS Legislative & Regulatory Affairs Department
December 2020

 NCUA is proposing an addition to § 791 that would codify the 2018 interagency statement issued by NCUA and its sister agencies that reiterated that supervisory guidance does not have the force and effect of law. The proposal also makes several modifications to the 2018 Statement.

The proposed rule may be read here. Comments are due to NCUA on January 4, 2021.

Summary

NCUA and the agencies issued the 2018 Statement to explain the agencies’ approach to supervisory guidance, including:

  • interagency statements
  • advisories
  • bulletins
  • policy statements
  • FAQs

In the 2018 Statement, the agencies affirm that supervisory guidance outlines the agencies’ supervisory expectations or priorities and articulates the agencies’ general views regarding appropriate practices for a given subject area, but does not create binding, enforceable legal obligations.

The 2018 Statement reaffirms that the agencies do not issue supervisory criticisms for ‘‘violations’’ of supervisory guidance.

In 2018, the agencies indicated they would:

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

In codifying the 2018 Statement, NCUA and the agencies propose the following clarifications and changes:

  • There was some confusion as to whether the 2018 Statement’s reference to not basing ‘‘criticisms’’ on violations of supervisory guidance included “matters requiring attention” (MRAs) or other supervisory actions. To clarify, the proposed statement would define ‘‘criticize’’ to include the issuance of MRAs and other supervisory criticisms, including those communicated through matters requiring board attention, documents of resolution, and supervisory recommendations. The agencies reiterate that examiners will not base supervisory criticisms on a ‘‘violation’’ of or ‘‘noncompliance with’’ supervisory guidance.

Specifically, the 2018 Statement read:

“Examiners will not criticize a supervised financial institution for a “violation” of supervisory guidance.”

The proposed addition to § 791 would read:

“Examiners will not criticize (including through the issuance of matters requiring attention, matters requiring immediate attention, matters requiring board attention, documents of resolution, and supervisory recommendations) a supervised financial institution for, and agencies will not issue an enforcement action on the basis of, a “violation” of or “non-compliance” with supervisory guidance.”

  • Industry had also expressed concerns that at times supervisory criticisms included generic references to safety and soundness. The agencies agree that supervisory criticisms should be specific as to the issue affecting safety and soundness. The proposed changes to § 791 would include the following statement:

The proposed rule would read:

Supervisory criticisms should continue to be specific as to practices, operations, financial conditions, or other matters that could have a negative effect on the safety and soundness of the financial institution, could cause consumer harm, or could cause violations of laws, regulations, final agency orders, or other legally enforceable conditions.

  • The agencies stress that the guidance being codified addresses the use of guidance in the supervisory process and not the standards for supervisory criticism in general. To address what they characterize as “confusion” the agencies have eliminated the following sentences from the 2018 Statement:

“Rather, any citations will be for violations of law, regulation, or non-compliance with enforcement orders or other enforceable conditions. During examinations and other supervisory activities, examiners may identify unsafe or unsound practices or other deficiencies in risk management, including compliance risk management, or other areas that do not constitute violations of law or regulation.”

Specific Request for Comment

The agencies ask for specific comment on the following questions:

Question #1 The proposed Statement provides that in some situations, examiners may reference (including in writing) 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. 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 be appropriate, or specific situations where providing such examples would not be appropriate?
Response  

 
Question #2 1.     2. Is it sufficiently clear what types of agency communications constitute supervisory guidance? If not, what steps could the agencies take to clarify this? 3. Are there any additional clarifications to the 2018 Statement that would be helpful?

 
Response  

 
Question #3 Are there any other additional clarifications needed to the 2018 Statement?
Response  

 
Question #4 Are there other aspects of the proposed rule about which you wish to comment?
Response  

 
Question #5 NCUA and the agencies ask several related questions regarding the use of plain language. They seek general feedback on whether the proposal is clearly organized and clearly presented. If not, what changes should be made to state the intent more clearly?
Responses  

 

 

Summary: NCUA Proposed Rule (FCUs Only); Derivatives Part 703

Prepared by NASCUS Legislative & Regulatory Affairs Department
November 2020

NCUA has proposed changes to Subpart B of Part 703, NCUA’s derivatives rule for federal credit unions (FCU).NCUA first approved derivatives for FCUs in 2014. NCUA’s derivatives rule only applies to FCUs. Federally insured state credit unions (FISCUs) are currently only required to notify NCUA if they intend to use derivatives pursuant to state law. See 741.219.

NCUA now proposed to eliminate the requirement that FISCUs notify NCUA 30-days prior to engaging in derivatives transactions and replace it with a requirement that FISCUs notify NCUA within 5 days after HAVING ENGAGED in a derivatives transaction.

The proposed changes for FCUs would:

  • Eliminate the pre-approval process for FCUs that are “complex” (assets of $500m+) with a Management CAMEL component rating of “1” or “2”
  • Eliminate the interim approval step for non-“complex” credit unions
  • Eliminate the specific product permissibility and replace it with mandatory characteristics
  • Eliminate the regulatory limits on the amount of derivatives

The proposed rule may be read here. Comments are due to NCUA December 28, 2020.

Summary

NCUA’s current derivatives rule is intentionally prescriptive. In 2014, NCUA felt FCUs lacked the experience to use derivatives and NCUA lacked the expertise to administer a derivatives rule. As NCUA provides FCUs with greater flexibility, it stresses that FCUs must maintain strong prudential controls, including appropriate risk management by experienced staff, as well as suitable policies, procedures, and management oversight.

FISCUs – § 741.219

NCUA’s current rule DOES NOT limit or otherwise affect FISCU derivatives authority. NCUA’s rule only requires FISCUs give NCUA notice of the intent to engage in derivatives transactions 30-days prior. NCUA now proposes amending Part 741.219(b) to simply require notice within 5 days AFTER a FISCU enters into its first derivatives transaction.

(b) Any credit union which is insured pursuant to title II of the Act must notify the applicable NCUA Regional Director in writing within five business days after entering into its first Derivatives transaction. Such transactions do not include those included in § 703.14 of this chapter.

FCU Changes

Loan Pipeline Management & “Put Options” – Part 701(21)(i)

NCUA allows FCUs to use Put Options as a form of loan pipeline management. NCUA is moving this authority from § 701.21(i) to consolidate it with other pipeline management authorities in a revised § 701.14(k). NCUA is not changing the FCU authority in existing § 701.21(i) other than to relocate it.

Mutual Funds – § 703.100

The current rule prevents FCUs from investing in registered investment companies or collective investment funds where the prospectus of the company or fund permit the investment portfolio to contain Derivatives. NCUA now proposes to allow FCUs to invest in mutual funds that engage in derivatives for the purpose of managing to manage IRR. In the Supplemental material, NCUA stresses that FCUs may not invest in mutual funds that engage in derivatives that do not manage IRR.

Definitions – § 703.102

NCUA is proposing making changes to several definitions, adding several definitions, and deleting some others. Specifically, NCUA is making revisions to the following defined terms (see page 68489 of the proposal):

  • Counterparty
  • Interest Rate Risk
  • Margin
  • Master Service Agreement
  • Net Economic Value
  • Senior Executive Officer
  • Threshold Amount
  • Trade Date

In addition, NCUA will the following definitions (see page 68490 of the proposal):

  • Domestic Counterparty – to be defined as a counterparty domiciled in the United States. The proposal would only allow FCUs to enter into derivatives transactions with Domestic Counterparties.
  • Domestic Interest Rates – to be defined as interest rates derived in the United States and are U.S. dollar denominated.
  • Earnings at Risk – to be defined as the changes to earnings, typically in the short term, caused by changes in interest rates. This type of modeling would be required for an FCU’s asset/ liability risk management under the proposal.
  • Written Options – to be defined as options where compensation has been received and the purchaser has the right, not obligation, to exercise the option on a future date. The proposed rule would prohibit Written Options for FCUs.

NCUA would eliminate the following existing definitions in a new rule:

  • Amortizing Notional Amount
  • Basis Swap
  • Cleared Swap
  • Credit Support Annex
  • Derivative Clearing Organization
  • Exchange
  • Fair Value
  • Forward Start Date
  • Futures
  • Futures Commission Merchant (FCM
  • Hedge
  

  • Interest Rate Swap
  • Introducing Broker
  • ISDA Protocol
  • Leveraged Derivative
  • Minimum Transfer Amount
  • Non-cleared
  • Notional Amount
  • Reporting Date
  • Swap Dealer
  • Swap Execution Facility
  • Unamortized Premium

 

Requirements/Characteristics of Permissible Interest Rate Derivatives – § 703.103

NCUA will replace existing § 703.102, Permissible Derivatives with the new proposed § 703.103 titled ‘‘Requirements related to the characteristics of permissible interest rate Derivatives.’’ This new section will replace prescriptive prohibitions with principle-based characteristics such as:

  • Denominated in U.S. dollars
  • Based off Domestic Interest Rates or dollar-denominated London Interbank Offered Rate (LIBOR)
  • A contract maturity equal to or less than 15 years, as of the Trade Date
  • Not used to create Structured Liability Offerings for members of nonmembers

FCUs could enter into derivatives transactions that meet those characteristics. In addition, FCUs would be allowed to participate in:

  • interest rate swaps
  • basis swaps
  • purchased interest rate caps
  • purchased interest rate floors
  • S. Treasury note futures

NCUA would eliminate the following requirements:

  • forward start date limitations
  • fluctuating notional amount limitations
  • restriction on leveraged derivatives
  • meeting the definition of derivative under GAAP

NCUA is retaining the prohibition against Written Options, but seeks comments on whether FCUs should be allowed to engage in Written Options for managing IRR.

Requirements for Counterparty Agreements, Collateral and Margining – § 703.104

Revising the requirements for counterparty agreements, collateral and margining, NCUA is proposing to require FCUs have an executed Master Services Agreement with a Domestic Counterparty that must be reviewed by counsel with relevant expertise in similar types of transactions. FCUs would also be required to use contracted Margin requirements with a maximum Margin threshold amount of $250k and accept only U.S. dollars, S. Treasuries; GSE or US government agency debt, GSE residential mortgage-backed security pass-through securities, or S. government agency residential mortgage-backed security pass-through securities as collateral.

Reporting Requirements – § 703.105

NCUA currently requires FCUs provide their board of directors, senior executives a comprehensive derivatives report. Under the proposal, NCUAS would retain the requirements for quarterly reporting to the FCU’s board and monthly reporting to executive management. NCUA is also retaining the requirements outlining what must be included in these reports.

Operational Support Requirements, Required Experience & Competencies – § 703.106(a)

NCUA will retain the current rule’s competency requirements, including:

  • Prior to engaging in derivatives, FCU’s board must obtain training
  • Senior executive officers must have knowledge and ability to supervise the program
  • The FCU’s board must be briefed annually on the program

The briefing requirement replaces an ongoing annually training requirement.

Operational Support Requirements; Required Review and Internal Controls Structure – § 703.106(b)

NCUA is retaining the requirement that an FCU identify and document the circumstances that lead to the decision to execute a transaction, specify the strategy the credit union will employ, and demonstrate the economic effectiveness of the transaction. NCUA is proposing to reduce the number of required internal controls reviews an FCU must conduct from at least once each year for the first 2 years to just 1 review in the first year.

The Board is retaining the current rule’s requirement that any FCU engaging in derivatives must obtain an annual financial statement audit and account for all transactions consistent with GAAP. NCUA also proposes adding a requirement for a a liquidity review.

External Service Providers – § 703.107

FCUs will be able to use External Service Providers (ESPs). FCUs will be able to use the ESPs provided the ESP does not:

  • Act as a counterparty to any Derivatives transactions that involve the FCU
  • Act as a principal or agent in any Derivatives transactions that involve the FCU
  • Have discretionary authority to execute any of the FCU’s Derivatives transactions

FCUs will be required to document the role of the ESPs in the FCU’s policies and procedures. NCUA also stresses that an FCU’s use of ESPs does not alleviate the credit union of its responsibility to employ qualified personnel in accordance with the operational support requirements of the proposed rule.

Notification and Application Requirements – § 703.108

NCUA proposes eliminating the application process for FCUs with at least $500m in assets and a CAMEL Management component rating of 1 or 2. FCUs would be required to provide the applicable RD a written notification within five business days after entering into its first Derivative transaction.

Regulatory Violation or Unsafe and Unsound Condition – § 703.109

If an FCU no longer meets requirements of the rule, the FCU must immediately stop entering into any new derivative transactions.

Final Rule: Corporate Credit Unions (Part 704)

Prepared by NASCUS Legislative & Regulatory Affairs Department
December 2020

NCUA has issued a final rule amending its corporate credit union regulations in § 704. The final rule addresses several provisions of the NCUA’s corporate credit union rule, including:

  • permitting a corporate credit union to make a minimal investment in a credit union service organization (CUSO) without the CUSO being classified as a corporate CUSO pursuant to § 704
  • expanding the categories of senior staff positions at member natural person credit unions (NPCUs) eligible to serve on a corporate credit union’s board
  • amending the minimum experience and independence requirement for a corporate credit union’s enterprise risk management (ERM) expert
  • clarifies the definition of a collateralized debt obligation
  • simplifies the requirement for net interest income modeling

The Final Rule may be read here. The final rule is effective December 14, 2020.   

NCUA’s corporate credit union rule applies to state-chartered corporate credit unions by reference in § 741.206.

Summary

  • Minimal Investment in Natural Person CUSOs

Under the final rule, corporate credit unions will be allowed to make de minimus, non-controlling investment in a NPCU CUSO without that CUSO being classified as a corporate CUSO. Corporate CUSO are subject to much more prescriptive regulations than NPCU CUSOs. For example:

  • permissible activities for a corporate CUSO are more limited than the permissible activities for a NPCU CUSOs
  • corporate CUSOs must agree to give NCUA complete access to personnel, facilities, equipment, books, records, & other documentation that NCUA deems pertinent while NPCU CUSOs must only provide access to its books & records & the ability to review its internal controls
  • corporate CUSOs must provide quarterly financial statements to the corporate credit union whereas NPCU CUSOs must prepare quarterly financial statements, but do not have to provide the statements to FCUs

With this rule change, NPCUs might be more willing to allow small corporate credit union investments into their CUSOs which could benefit NPCUs by opening a new pool of investors and benefit corporates by allowing them to leverage the innovation of NPCU CUSOs.

  • New Definitions – § 704.2

The final rule has several new definitions, including:

  • Consolidate CUSO – any CUSO the assets of which are consolidated with those of the corporate credit union for purposes of reporting under GAAP
  • Corporate CUSO – a CUSO in which one or more corporate credit unions have a controlling interest, defined as:

(1) the CUSO is consolidated on a corporate credit union’s balance sheet;

(2) a corporate credit union has the power, directly or indirectly, to direct the CUSO’s management or policies;

(3) a corporate credit union owns 25% or more of the CUSO’s contributed equity, stock, or membership interests; or

(4) the aggregate corporate credit union ownership of all corporates investing in the CUSO is 50% or more of the CUSO’s contributed equity, stock, or membership interests

  • Credit Union Service Organization (CUSO) – the final rule defines a CUSO as applying to both corporate CUSOs and NPCU CUSOs.

Loans to CUSOs

Under the final rule, a corporate credit union making loans to NPCU or corporate CUSOs must have a board-approved policy that:

  • provides for ongoing control, measurement, and management of CUSO lending
  • includes qualifications and experience requirements for personnel involved in underwriting, processing, approving, administering, and collecting loans to CUSOs
  • establishes the loan approval process, underwriting standards, and risk management processes

In addition, NCUA requires any NPCU CUSO in which a corporate credit union invests or to which a corporate credit union makes a loan must comply with § 712 in its entirety.

Disclosure of Executive Compensation – § 704.19

Section 704.19 currently requires that each corporate credit union annually prepare and maintain a document that discloses the compensation of certain employees, including compensation received from a corporate CUSO. Under the final rule, employee compensation from either a NP CUSO or a corporate CUSO must be reported. Corporate CUSOs are required to report the compensation of a dual employee, however there is no requirement for the NPCU CUSO to report the income, therefore the dual employee is obligated to report the income to the corporate credit union in order for that corporate credit union to meet its reporting obligations.

Corporate Credit Union Board Representation – § 704.14

Currently, NCUA rules require corporate credit union directors hold the following positions as a NPCU: CEO, CFO, COO, treasurer, or manager. The final rule makes this preceding list a set of examples and requires only that the corporate credit union directors hold a senior management position at a NPCU.

Enterprise Risk Management – § 704.21

NCUA has eliminated the prescriptive independence and experience rules related to the required ERM position in corporate credit unions. The final rule also clarifies that the ERM expert may report either to the corporate credit union’s board of directors or to the ERMC. Corporate credit unions now have the flexibility the appropriate level of experience necessary for the position and the reporting structure. The ERM officer and function should be commensurate with the complexity and risk of the corporate credit union. NCUA will evaluate the adequacy of a corporate credit union’s enterprise risk management practices through the supervisory process.

Summary: ANPR, Simplification of the RBC Requirements (Parts 702 & 703)

Prepared by NASCUS Legislative & Regulatory Affairs Department
February 2021

NCUA has published an Advance Notice of Proposed Rulemaking (ANPR) to solicit comments on simplifying the October 29, 2015 final risk-based capital (RBC) rule scheduled to take effect on January 1, 2022. NCUA proposes 2 different approaches for simplifying the rule:

  • Replace the RBC rule with a Risk-based Leverage Ratio (RBLR) requirement, which uses relevant risk attribute thresholds to determine which complex credit unions would be required to hold additional capital (buffers).
  • Retain the 2015 final RBC rule but enable eligible complex FICUs to opt-in to a “complex credit union leverage ratio” (CCULR) framework to meet all regulatory capital requirements (modeled on the “Community Bank Leverage Ratio” framework).

The proposed rule may be read here. Comments are due to NCUA 60 days after publication in the Federal Register.  

Summary

The 1998 Credit Union Membership Access Act (CUMAA) added § 216 to the Federal Credit Union Act (FCUA) creating a system of Prompt Corrective Action (PCA) for federally insured credit unions (FICUs).

Section 216(d)(1) of the FCUA required that the PCA rules include both the statutory net worth ratio requirements as well as a risk-based net worth requirement for credit unions that are complex (as defined by NCUA). NCUA implemented § 216 by rule in 2000. In 2015, NCUA finalized revisions to the rule that included replacing a credit union’s RBNW ratio with a RBC ratio. The 2015 rule defined complex credit unions as having

total assets over $100 million. In 2018, NCUA raised that threshold again to $500 million. The rule however will not take effect until January 1, 2022.

NCUA now seeks input on 2 potential alternatives to the 2015 (as amended) RBC rule. As noted above, the Risk-Based Leverage Ratio (RBLR) approach would include repealing the 2015 final rule in its entirety and recreating an entirely new risk-based capital rule. The Complex Credit Union Leverage Ratio (CCULR) would amend the 2015 rule to provide an alternative framework for some qualifying credit unions.

Option 1: Replacing the Entire 2015 RBC Rule with The Risk-Based Leverage Ratio (RBLR)

NCUA seeks input on whether it should repeal the 2015 RBC rule and replace it with a “simpler” framework that would be easier for credit unions to understand and for NCUA to administer. The simplified framework would still, in NCUA’s view:

  • comply with all applicable statutory and legal requirements, including the statutory PCA requirements
  • be easier to understand and use
  • effectively identifies risk characteristics that trigger commensurate capital requirements.

The new approach would be called a risk-based leverage ratio (RBLR) and would utilize certain risk characteristics to determine the required capital level rather than risk weight all assets and off-balance sheet activities (as is done in the current 2015 rule approach). NCUA is also considering using the net worth ratio as the RBLR measurement, which is already a well-established, simplified, and observable measurement.

Under this approach, the net worth ratio would be supplemented with mandatory capital buffers when certain risk factors are triggered. The capital buffers would be a discreet percentage of net worth-to-total assets over 7%. NCUA is considering using the asset categories from the 2015 Final Rule as risk factors. For example, the 2015 rule weights the following categories as higher risk:

  • non-current loans
  • commercial loans exceeding 50% of assets
  • junior lien real estate loans exceeding 20% of assets
  • mortgage servicing rights
  • other investment activities

If a FICU met a certain threshold of activity, then that could trigger a requirement to hold a buffer amount of net worth. The buffer amount might also vary based on the level of the applicable threshold. The minimum leverage ratio necessary to be well capitalized under RBLR would remain at 7%, with two higher tiers applied to those complex credit unions exhibiting quantified amounts of higher relative risk. The defining risk attributes would be a function of the types and concentration of underlying assets.

NCUA envisions converting the current computational framework for complex credit unions into a three-tiered system of minimum leverage ratios for all complex FICUs would be much simpler and would significantly reduce the Call Report requirements and utilize a measurement that FICUs are already familiar with.

However, NCUA cautions that while an RBLR approach would be simpler, it may also result in a higher capital requirement for certain FICUs that have riskier assets when compared to the risk-based capital framework.

NCUA seeks general feedback on this approach, and comments on the following specific questions:

  • Question #1: Does the RBLR have merit as an alternative to the RBC framework under the 2015 Final Rule. What risk characteristics should be incorporated into the RBLR? Are the higher risk-weighted asset categories from the 2015 RBC rule framework the correct starting point, or should the Board consider a different approach?
  • Question #2: What risk thresholds should be used for the risk factors. What measurements should be used and how would the measurement be reported and monitored? Should there be more than one capital buffer for a risk factor based on the measurement? How would multiple measurements be combined or weighted to determine the threshold?
  • Question #3: What capital buffers over the well-capitalized seven percent threshold should be used?

Impact of RBLR on Subordinated Debt Final Rule

Any changes to NCUA’s capital rules would potentially affect NCUA’s recently finalized Subordinated Debt rule. The Subordinated Debt Rule is a direct amendment to the 2015 Final RBC rule. Therefore, rescinding the 2015 rule to replace it with the RBLR framework would fundamentally alter the structure of the Subordinated Debt rule. For example, using a net-worth based rule may not provide a means for non-LICUs to use subordinated debt because the FCUA includes a definition of net worth the limits use of such instruments to LICUs.

  • Question #4: How may a non-LICU complex credit union be able to apply subordinated debt towards an RBLR capital calculation?

Option 2: Amending the 2015 RBC Rule to Include a Complex Credit Union Leverage Ratio (CCULR)

In 2019, federal banking agencies (FBAs) promulgated the Community Bank Leverage Ratio (CBLR ), an optional framework to the RBC requirements for depository institutions and depository institution holding companies that meet the following 5 criteria:

  • A leverage ratio greater than 9%
  • Total consolidated assets of less than $10 billion
  • Total off-balance sheet exposures of 25% or less of its total consolidated assets;
  • Trading assets plus trading liabilities of 5% or less of its total consolidated assets
  • Not an advanced approaches banking organization

“Qualifying community banking organizations” meeting these 5 criteria that opt into the CBLR framework are considered to be in compliance with the FBAs applicable RBC and leverage capital requirements. In exchange, the qualifying banking organization must maintain a greater amount of capital than normally required to be deemed well capitalized. Qualifying community banking organizations may opt into or out of the CBLR framework at any time.

The banking framework includes a 2-mquarter grace period during which a qualifying community banking organization that temporarily fails to meet any of the qualifying criteria, including the greater than 9% leverage ratio requirement, will still be deemed well capitalized. However, the qualifying community banking organization must maintain a leverage ratio greater than 8%.

At the end of the grace period, the banking organization must meet all qualifying criteria to remain in the CBLR framework or otherwise must comply with and report under the generally applicable risk-based and leverage capital requirements. A banking organization that fails to maintain a leverage ratio greater than 8% will not be permitted to use the grace period and must comply with the generally applicable capital requirements and file the appropriate regulatory reports.

NCUA is considering developing the CCULR as a similar approach for credit unions. Complex credit unions meeting certain criteria and choosing to opt-into the approach would be relieved from the requirement of calculating a risk-based capital ratio as implemented by the 2015 rule. Rather, qualifying complex credit union would be required to maintain a higher net worth ratio than is otherwise required for the well-capitalized classification.

This is a similar trade-off to the one made by qualifying community banking organizations under the CBLR.

  • Question #5: Should the NCUA capital framework be amended to adopt an “off-ramp” such as the CCULR to the risk-based capital requirements of the 2015 Final Rule?
  • Question #6: The Board invites comment on the criteria for CCULR eligibility. Should the Board adopt the same qualifying criteria as established by the other banking agencies for the CBLR? In recommending qualifying criteria regarding a credit union’s risk profile, please 19 provide information on how the qualifying criteria should be considered in conjunction with the calibration of the CCULR level under question 7, below.
  • Question #7: What assets and liabilities on a FICU’s Call Report should the Board consider in determining the net worth threshold? How should each of these items be weighted?
  • Question #8: What are the advantages and disadvantages of using the net worth ratio as the measure of capital adequacy under the CCULR? Should NCUA consider alternative measures for the CCULR? For example, instead of the existing net worth definition, the CCULR could use the risk-based capital ratio numerator from the 2015 Final Rule, similar to the “Tier 1 Capital” measure used for banking institutions.
  • Question #9: Should all complex credit unions be eligible for the CCULR, or should the Board limit eligibility to a subset of these credit unions? For example, the Board could consider limiting eligibility to the CCULR approach to only complex credit unions with less than $10 billion in total assets.
  • Question #10: The Board invites comment on the procedures a qualifying complex credit union would use to opt into or out of the CCULR approach. What are commenters’ views on the frequency with which a qualifying complex credit union may opt into or out of the CCULR approach? What are the operational or other challenges associated with switching between frameworks?
  • Question #11: What should be the treatment for a complex credit union that no longer meets the definition of a qualifying criteria after opting into the CCULR approach. Should NCUA consider requiring complex credit unions that no longer meet the qualifying criteria to begin to calculate their assets immediately according to the risk-based capital ratio? Should a grace period be provided? What other alternatives should NCUA consider with respect to a complex credit union that no longer meets the definition of a qualifying complex credit union and why? Is notification that a credit union will not meet the qualifying criteria necessary?
Summary: Proposed rule, Risk Based Net Worth – COVID 19 Relief; Complex credit union threshold (Part 702)

Prepared by NASCUS Legislative & Regulatory Affairs Department

February 2021

NCUA is proposing to raise the asset threshold for defining a credit union as “complex” for purposes of being subject to risk-based net worth (RBNW) requirement in § 702 of the NCUA’s regulations. The proposal would amend § 702 to apply the RBNW to FICUs with quarter-end assets that exceed $500 million.

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

Summary

Currently, the NCUA defines a credit union as complex and subject to the RBNW requirement only if the credit union has quarter-end assets that exceed $50 million and its risk-based net worth requirement exceeds 6%. NCUA has also issued rules to create a risk-based capital (RBC) requirement for larger complex credit unions with assets over $500 million which will become effective on January 1, 2022. However, until that effective date in 2022, the RBC rules still apply to credit unions with only $50 million in assets.

NCUA now proposes amending § 702.103 to raise the RBNW threshold to $500 million to match the RBC threshold. NCUA notes that even with the raised RBNW threshold, 81.6% of FICU assets would be classified as complex. In terms of relief, NCUA notes that increasing complexity threshold to $500 million would provide potential relief to 1,737 FICUs. In addition, there are 94 complex credit unions with assets totaling $66 billion which are required to hold capital above 7% to be well capitalized based on their risk-based net worth requirement. Of the 94 credit unions, 67 have assets less than $500 million and would no longer be required to hold more capital to remain well capitalized. This would allow those credit union redeploy their capital to assist their members.

Summary: NCUA Proposed Rule BSA Part 748

Prepared by NASCUS Legislative & Regulatory Affairs Department
January 2021

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

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

Summary

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

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

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

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

Innovation in Compliance and Regulatory Flexibility

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

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

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

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

Proposed Rule

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

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

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

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

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

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

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

Prepared by NASCUS Legislative & Regulatory Affairs Department
February 2021

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

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

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

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

Summary

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

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

Prepared by NASCUS Legislative & Regulatory Affairs Department
March 2021

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

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

Summary

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

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

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

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

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

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

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

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

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

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

NASCUS Legislative and Regulatory Affairs Department
January 24, 2024

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

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

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

Summary

Credit Risk

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

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

Liquidity Risk

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

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

Consumer Financial Protection

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

Key areas of focus for examiners in 2024 will be:

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

Information Security (Cybersecurity)

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

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

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

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

Interest Rate Risk

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

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

Other Updates 

Bank Secrecy Act (BSA) Compliance 

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

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

Support for Small Credit Unions and Minority Depository Institutions

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

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

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

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

NASCUS Legislative and Regulatory Affairs Department
December 26, 2023

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

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

Summary of Key Updates

Preamble and Basic Applicant Information

Process for changing certification-related lists and standards

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

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

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

Loan Purpose Tables and Product Pricing Data

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

Primary Mission

Documenting Mission and Strategy

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

Responsible Financing Standards

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

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

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

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

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

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

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

Considerations Related to Specific Products and Services

Mortgage Lending

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

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

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

Consumer Lending

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

Overdraft Products and Non-Sufficient Funds Fees

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

Financing Entity

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

Target Market

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

Removal of geographic boundaries on pre-qualified Investment Area

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

Customized Investment Areas (CIA) and non-Metro counties

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

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

New Other Targeted Populations (OTP)

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

Structured Development Services

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

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

Accountability

Accountability methods

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

Increased Flexibility

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

Advisory Board and Advisory Board Policy Assessment

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

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

Employee Accountability Consideration

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

Board Compensation

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

Financial Interest – Active Financial Products

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

Grace Period for Currently Certified CDFIs

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

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

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