Request for Information Regarding Mortgage Refinances and Forbearances

CFPB Summary: Request for Information Regarding Mortgage Refinances and Forbearances

The Consumer Financial Protection Bureau (CFPB) is seeking comment from the public about (i) ways to facilitate mortgage refinances for consumers who would benefit from refinancing, especially consumers with smaller loan balances; and (ii) ways to reduce risks for consumers who experience disruptions in their financial situation that could interfere with their ability to remain current on their mortgage payments.

Comments are due on the RFI no later than November 28, 2022. The RFI can be found here.

Summary:

The Bureau is requesting information about (i) ways to facilitate residential mortgage loan refinances for borrowers who would benefit from refinances, especially borrowers with smaller loan balances; and (ii) ways to reduce risks for borrowers who experience disruptions that could interfere with their ability to remain current on their mortgage payments.

The Bureau looks at a number of possible means to facilitate beneficial refinancing:

  • Targeted and streamlined refinance programs – programs used to refinance programs through reduced underwriting and documentation requirements, typically with lower transaction costs than traditional refinances. These programs are generally aimed at lowering interest rates and monthly payments for consumers who may otherwise be unlikely or unable to refinance.
  • New Products to Facilitate Beneficial Refinances – Some creditors have introduced mortgage products designed generally to promote beneficial refinances such as offering reduced closing costs on future refinancing with the same creditor or “auto-refi” mortgages.
  • Forbearances/Other Loss Mitigation – the Bureau discussed the benefits of forbearance/loss mitigation programs like the CARES Act and similar forbearance programs offered by private companies.

Request for Comment:

The Bureau welcomes comments from consumers, creditors, and other stakeholders including the submission of descriptive information about experiences of people participating in the mortgage market.

Barriers to Refinancing

  • What barriers may prevent consumers from accessing falling interest rates through refinancing and what solutions could lower those barriers, particularly for consumer with smaller loan balances?
  • Are there particular issued in obtaining refinances or would any particular approaches be more effective for certain types of homeowners, such as servicemembers, older adults, and first-time homeowners?
  • To what extent do large fixed costs of refinancing and limited profitability for smaller loan balances limits beneficial refinances?
  • What potential policies could lower costs for beneficial refinances?
  • How much do common risk-based underwriting factors like credit scores and loan to value ratios account for the differences in refinancing rates across the population?
  • To what extent do the types of creditors offering refinance products in particular geographic areas affect refinancing rates in some areas and for some consumers?
  • To what extent are refinancing rates affected by potential barriers that may be more difficult to quantify, including borrowers’ shopping behavior, trust of financial institutions, or the complexity and documentation involved in the refinancing process?
  • To what extent do consumers in rural areas face limited opportunities for refinances and what are the factors, including smaller loan balances, that may limit refinance opportunities for those consumers?

 

Targeted and Streamlined Refinances

 

  • How can the Bureau support industry efforts to facilitate beneficial refinances through targeted and streamlined refinance programs?
  • What are the current barriers to widespread use or promotion of existing refinance programs and, relatedly, what features of refinance programs are important to promoting widespread use?
  • What protections should be included in refinance programs to ensure consumer benefit, such as requirements for a lower interest rate and monthly payments, loan term limits, limits on serial refinancing, and requirements to refinance the consumer into a more stable mortgage product?
  • Should the Bureau’s rules, including the ART-QM rule, be amended to encourage beneficial refinances while preserving important protections for consumers? If so, how? What are the risks/benefits of doing so?
  • What are the risks and benefits of removing or modifying the current ATR-QM requirement that a creditor must consider and verify a consumer’s income or assets relied on in making the loan in the context of a refinance program?

Potential New Products to Facilitate Refinances

  • What products/programs have lenders introduced to attempt to facilitate refinances for borrowers who would benefit from refinancing? What are the advantages and disadvantages of these products and programs?
  • What are the potential benefits and drawbacks of auto-refi mortgages and one way ARMs?
  • Could creditors feasibly market and price auto-refi mortgages and one-way ARMs?
  • How could creditors most effectively structure auto-refi mortgages?
  • How could creditors most effectively structure one way ARMs?
  • How could these products be designed to minimize risks to consumers?
  • Under what market conditions should an auto-refi mortgage automatically refinance?
  • Under what market conditions should the rate of one-way ARM change?
  • Should these conditions be regulated or left to market forces?
  • Do any market factors or practical difficulties, including secondary market liquidity and mortgage-backed securities (MBS) investor interest, preclude the development of auto-refi mortgages or one-way ARMs? How would these or similar products impact the MBS market?
  • Should the Bureau amend the ATR-QM rule or other regulations to permit or encourage creditors to offer auto-refi mortgages or one-way ARMs? If so, how?
  • Are there any other new products that creditors could feasibly develop that would allow more borrowers to receive the benefits of reduced mortgage interest rates?
  • Would these products be prohibited or discouraged by existing regulations promulgated by the Bureau?
  • Should the Bureau (or other Federal regulators) amend regulations to permit or encourage the development of these products?
  • Are there other legal impediments or policies that may deter the introduction of auto-refi mortgages, one way ARMs, or other new products that could facilitate beneficial refinances?

Forbearances/Other Loss Mitigation

  • What are the benefits and drawbacks of automating and streamlining short and long-term loss mitigation offers?
  • If such automation and streamlining of loss mitigation offers is incorporated within new mortgage products:
    • How should such products be structured?
    • How and where should such features be established?
  • Under what circumstances should short or long-term loss mitigation solutions be offered automatically? For example, should forbearance be offered automatically upon the declaration of a national emergency or presidentially declared disaster, when unemployment rates in the consumer’s locality reach a certain level, when a borrower loses their job, when a co-borrower on the loan dies, or under other circumstances? What factors should be considered regarding these circumstances? Should any documentation from the consumer be required in any of these circumstances?
  • For short-term loss mitigation solutions, such as forbearance, to what extent is there tension between the goal of offering meaningful immediate payment relief and the goal of ensuring that the balance owned does not grow so large as to make long-term loss mitigation solutions difficult to achieve? Should there be a maximum solution and, if so, what is the appropriate maximum length?
  • What impact would the Bureau’s mortgage servicing regulations, such as those relating to communications with delinquent borrowers, the Bureau’s regulatory definition of delinquency, and the loss mitigation process in general, have on automating and streamlining short and long-term loss mitigation offers?
  • What changes, if any, should be considered relating to the impact that forbearances and other short-term loss mitigation solutions would have on a consumer’s credit reporting?
  • Should standards be set to ensure affordability of long-term loss mitigation solutions? If so, what features of a long-term loss mitigation solution would best help ensure long-term affordability? For example, would term extension, limits on monthly payment increases, or principal forgiveness assist with the goal of long-term affordability?
  • When considering the potential automation and streamlining of short and long-term loss mitigation offers, would there be advantages or drawbacks if more creditors retained servicing of the mortgage loans they originate? Do payment relief advantages exist when an original creditor retains servicing of a mortgage loan? If so, should the Bureau consider ways to encourage originators to retain the servicing of mortgage loans?
  • When considering the potential automation and streamlining of short and long-term loss mitigation offers, are there particular issues or would any particular approaches be more effective for certain types of homeowners, such as servicemembers, older adults, and first-time homeowners?
  • Other than the mortgage products already mentioned in this RFI, are there other mortgage products or features of mortgage products that could help borrowers weather various financial shocks? What are the advantages or drawbacks of those mortgage products or features of mortgage products?
  • Are there other options not mentioned in this RFI that could help achieve the goal of reducing risk for homeowners who are facing financial hardship? If so, what are those options?

Notice of Proposed Rulemaking and Request for Comment
NCUA: Subordinated Debt

NASCUS Legislative and Regulatory Affairs Department
October 5, 2022

At the September 22, 2022, NCUA Board meeting, the Board approved for comment a proposed rule that would amend the Subordinated Debt rule (the Current Rule), which the Board finalized in December 2020 with an effective date of January 1, 2022. The proposal would make two changes related to the maturity of Subordinated Debt Notes and Grandfathered Secondary Capital (GSC).

The proposed rule also includes four other minor modifications to the current subordinated debt rule. The proposed rule in its entirety can be found here. Comments are due December 5, 2022.

Summary

At the December 2020 NCUA Board meeting, the Board issued a final Subordinated Debt rule. This rule permitted Low Income Credit Unions (LICUs), complex credit unions, and new credit unions to issue Subordinated Debt for purposes of Regulatory Capital treatment. This rule also included a provision providing any secondary capital issued by LICUs under previously effective 12 CFR §701.34(b)[1], would be considered GSC. This rule also contained a provision requiring notes to have a minimum maturity of five years and a maximum maturity of 20 years.

After the issuance of this final rule, Congress passed the Consolidated Appropriations Act of 2021. The Consolidated Appropriations Act created the Emergency Capital Investment Program (ECIP), in which Congress appropriated funds and directed Treasury to make investments in “eligible institutions” to support their efforts to “provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers, especially in low-income and underserved communities.”

Under Treasury’s terms, credit unions eligible to participate in the ECIP program were permitted to apply to NCUA for secondary capital treatment. Treasury offered 15 or 30-year maturity options for the investments.

In October 2021, NCUA issued LTCU 21-CU-11 permitting LICUs participating in ECIP to issue 30-year subordinated debt instruments. In December 2021, the Board issued a final amendment to the Current Rule permitting secondary capital to be considered GSC regardless of the actual issuance date provided a secondary capital issuance was:

  • To the U.S. Government; and
  • Secondary Capital application was approved before January 1, 2022, under §701.34 or §741.203[2] for federally insured state-chartered credit unions.

Due to the conflict between the 20-year maximum term for regulatory capital treatment for GSC under the Current Rule and the 30-year maturity under ECIP, the NCUA conducted a study. Based on the research findings, the board is proposing the following amendments.

Proposed Rule Provisions

Specifically, the Board is proposing revisions to §702.401(b) to permit GSC to receive Regulatory Capital treatment for a period of 30 years from the later date of issuance or January 1, 2022. This change would:

  • Align the Regulatory Capital treatment with the maximum permissible maturity for secondary capital issued under the ECIP.
  • Align the Regulatory Capital treatment across all GSC. This alignment would provide flexibility to LICUs with GSC that have a maturity longer than 20 years while striking a balance between transitioning issuers of GSC to the Current Rule and ensuring that instruments do not indefinitely remain GSC.

In place of the 20-year maximum maturity, the proposal would instead require a credit union to provide certain information under §702.408 when applying to issue Notes with maturities longer than 20 years from the date of issuance. To demonstrate the issuance is debt, the proposal includes a new paragraph in §702.408(b) requiring a credit union applying to issue Notices with maturities longer than 20 years to submit, at the discretion of the appropriate supervisory office, one or more of the following:

  • A written legal opinion from Qualified Counsel;
  • A written opinion from a licensed CPA; and
  • An analysis conducted by the credit union or independent third party.

The proposal notes, while unlikely, it is still possible a legal or CPA opinion may be necessary to fully ensure that a Note would be considered debt irrespective of the degree to which the maturity exceeds 20 years.

The Board is proposing four additional modifications to the Current Rule. The proposed amendments include:

Amending the definition of “Qualified Counsel” to clarify that such a person(s) is not required to be licensed to practice law in every jurisdiction that may relate to the issuance of subordinated debt. Specifically, the change would specify that a “Qualified Counsel” is:

  • Licensed to practice law;
  • Has expertise in the areas of Federal and state securities laws and debt transactions similar to those described in the Current Rule; and
  • Qualified to provide sufficient advice to a credit union to comply with the requirement in §702.406(f) that an Issuing Credit Union must comply with all applicable Federal and state securities laws.

Therefore, the proposal would remove “in the relevant jurisdiction(s)” from the definition of “Qualified Counsel.” It is important to note that issuing credit unions must comply with all Federal and state securities laws

Remove the “statement of cash flow” from the Pro Forma Financial Statements requirement and replace it with a requirement for “cash flow projections.” This proposed change would better align the requirements of the current rule with the customary way credit unions develop Pro Forma Financial Statements and “cash flow projections.”

Revise the section of the current rule on filing requirements and inspection of documents. This change would align the NCUA rule with current agency procedures and would specifically:

  • Remove the phrase “inspection of documents” as the Board believes FOIA is the appropriate mechanism for requesting Subordinated Debt applications and documents.
  • Replace the current requirement that a credit union submit all applicable documents via the NCUA’s website with a requirement that a credit union make all submissions directly to the Appropriate Supervision Office.

Remove a parenthetical reference related to GSC that no longer counts as regulatory capital. §702.414(c) would be revised by removing “(“discounted secondary capital” re-categorized as Subordinated Debt).” This change would align the rule with recent changes made to the Call Report.

[1] 86 Fed. Reg., 72807 (December 23, 2021)

[2] 84 Fed. Reg. 1608, (February 5, 2019)

NCUA Proposed Rule Summary: Federal Credit Union Bylaws Relating to Expulsion of a Member

NASCUS Legislative and Regulatory Affairs Department
September 27, 2022

During the September 22, 2022, NCUA Board Meeting, the Board approved for publication and comment a proposed rule providing bylaw amendments that would allow additional authority for FCUs in the expulsion of members for cause.  The proposed rule seeks to incorporate legislative changes resulting from the March 15, 2022, effective Credit Union Governance Modernization Act of 2022 (Governance Modernization Act) which ordered NCUA to develop policy by which a FCU member may be expelled by a two-thirds vote of a quorum of the FCU’s board of directors.

The deadline to submit a comment is December 2nd, 2022. The proposed rule may be read in its entirety here.

Summary

Under current bylaws, FCUs are limited to two methods in the expulsion of a member: (1) A two-thirds vote of the membership present at a special meeting called for that purpose after the individual is provided an opportunity to be heard; and (2) for non-participation in the affairs of the credit union, as specified in a policy adopted and enforced by the board.[1]  These requirements are set out in the standard FCU Bylaws in Appendix A of the NCUA’s regulations.[2]

During the process of amending the Bylaws resulting in the 2019 Bylaws Final Rule[3] concerns were expressed that current FCU bylaws limited a FCUs ability to mitigate threats or financial harm caused by violent, belligerent, or disruptive members.

As existing expulsion parameters were outlined within the FCU Act, bylaw changes to appropriately address those concerns in 2019 were restricted to allowing a credit union to limit services provided to disruptive members by defining a “member in good standing”.[4]  Members no longer meeting the good standing requirements, while retaining membership, could see their access to all or some of the services provided by the credit union curtailed if their conduct caused a loss to the FCU or threatened the safety of credit union staff, facilities or membership or its surrounding property.  While access to services could be limited, members outside of good standing still maintained rights to attend, participate, and vote at meetings and to maintain a share account unless expulsion was gained through the options outlined above.

While the concept of “member in good standing” created in the 2019 rule change is being retained, the passage of the Governance Modernization Act provides FCU boards of directors with direct authority (subject to the promulgation of the proposed rule and an appropriate board policy) to expel a member for cause.

As written, the proposed rule outlines broad rights and responsibilities of the FCU and the involved member but lacks prescriptive details as to the format of meetings and related processes.  Such broad language is presumably established to allow each institution the freedom to adopt an appropriate policy that fits into each institutions current structure and specific processes within the structure of the bylaws and existing law.  However, the proposal does request feedback in several areas as to whether more prescriptive language would be appropriate to include in the bylaws and why, instead of allowing these procedures to be implemented through board approved policies.

Proposed Rule Provisions

In addition to existing FCU authority to immediately limit services to members who caused a loss to the credit union and/or exhibited violent or abuse behavior, the proposed rule would provide an avenue for a FCU’s board to expel a disruptive member.

Under the proposed changes a FCU’s board may expel a member for cause, defined as:

  1. a substantial or repeated violation of the membership agreement of the credit union;
  2. a substantial or repeated disruption, including dangerous or abusive behavior (as defined by the National Credit Union Administration Board pursuant to a rulemaking), to the operations of a credit union; or
  3. fraud, attempted fraud, or other illegal conduct that a member has been convicted of in relation to the credit union, including the credit union’s employees conducting business on behalf of the credit union.

 

The proposed rule maintains the concept, but lacks specific definition of, substantial and non-substantial incidents and requires expulsion for any non-substantial incidents to be preceded by at least one previous notice to the member regarding the exhibited behavior and documentation to support the repetitive nature of that behavior.  Approved policies by the FCU board are expected to define substantial and non-substantial incidents.

Members being expelled must be notified of the pending expulsion by mail, or electronically if the member has opted into such notices.  Notice must include the specific reasoning, and examples of the disruptive behavior(s), for the proposed expulsion and not include conclusory statements.  A member provided notice is afforded the right to request a hearing within a timeframe no less than 60 days from the notification receipt which must also be prescribed within the notice.  If the member does not provide a request for a hearing a member is automatically expelled at the conclusion of the stated 60-day notification period requiring no further action by the FCU board.

If a hearing is requested, the proposed rule outlines that a FCU may not raise any rationale or reasoning not explicitly provided in the initial notice although a second notice with additional information may be issued in a new notice of expulsion, which would initiate a new 60-day appeal response deadline for the member.

After a hearing the FCU board of directors must hold a second vote on the member expulsion within 30 calendar days considering any arguments made by the member.

A final notice of expulsion must be provided to a member regardless of its implementation automatically (due to a member’s lack of appeal) or through a final expulsion vote by the board after an appeal hearing.  A final notice must provide pertinent information to the member including that an expulsion does not relieve the member of their contractual obligations to the FCU, the members right to collect any outstanding shares and the delivery method for return the member’s funds.  In incidents where deductions are made from funds distributed to the excluded member, a line-by-line accounting relevant to the separation of membership must also be provided.

Finally, the proposed rule adopts the Governance Modernization Act requirements that any expelled member can be reinstated by either a majority vote of a quorum of the directors or a majority vote of the members present at a special meeting.  An expelled member would not be entitled to attend in person under the statutory provisions, but a FCU could determine whether to permit in-person attendance within the outlined policy.  The proposed rule specifies that a FCU is only required to hold a meeting under the reinstatement provision for a member once.

If a special meeting of the membership is instituted to expel a member such a meeting must be in person and the vote can only include members present at the meeting.

Under the proposed rules exclusion of a member is only allowed on a case-by-case basis and not to be administered to a class of members (such as through delinquency performance).

[1] 12 U.S.C. 1764.

[2] 12 CFR part 701, App. A. Section 108 of the FCU Act requires the Board to prepare periodically a form of bylaws to be used by FCU incorporators and to provide that form to FCU incorporators upon request. 12 U.S.C. 1758. FCU incorporators must submit proposed bylaws to the NCUA as part of the chartering process. Once the NCUA has approved an FCU’s proposed bylaws, the FCU must operate according to its approved bylaws or seek agency approval for a bylaw amendment that is not among permissible options in the standard FCU Bylaws. 12 CFR 701.2(a).

[3] 84 FR 53278 (Oct. 4, 2019).

[4] 12 CFR part 701, App. A. Art. II, Sec. 5

Summary: Ensuring Responsible Development of Digital Assets

Prepared by NASCUS Legislative & Regulatory Affairs Department
September 2022

On March 9, 2022, the Biden Administration issued Executive Order 14067 ‘‘Ensuring Responsible Development of Digital Assets.’’ The Executive Order outlined the following principal U.S. policy objectives with respect to digital assets:

  • Protection of consumers, investors, and businesses in the United States.
  • Protection of United States and global financial stability and the mitigation of systemic risk.
  • Mitigation of illicit finance and national security risks posed by misuse of digital assets.
  • Reinforcement of U.S. leadership in the global financial system and in technological and economic competitiveness, including through the responsible development of payment innovations and digital assets.
  • Promotion of access to safe and affordable financial services.
  • Support of technological advances that promote responsible development and use of digital assets.

Executive Order 14067 also directed various federal agencies to scrutinize the use of digital assets in the facilitation of financial crimes. In September 2022, the Biden Administration released a framework developed by the Treasury Department for the responsible development of digital assets. Now, the Treasury Department has published this Request for Comments (RFC) seeking input on any matter relevant to Treasury’s ongoing efforts to assess the illicit finance risks associated with digital assets as well as the ongoing efforts to mitigate the risks.

Comments are due to the Treasury Department on or before November 3, 2022. The Request for comments may be read in its entirety here.

The Request for Comments

Commenters are encouraged to address any or all of the following questions, or to provide any other comments relevant to the development of the report. The RFC is organized into 5 sections addressing the risks of illicit activity presented by digital assets, the BSA/AML regulatory framework for digital assets, global consistency in anti-money laundering standards, private sector engagement with digital assets and AML solutions, and Central Bank Digital Currencies.

A. Illicit Finance Risks

  1. Has Treasury comprehensively defined the illicit financing risks associated with digital assets? Please list any key illicit financing risks that we have not raised in this Action Plan or the National Risk Assessment.
  2. How might future technological innovations in digital assets present new illicit finance risks or mitigate illicit finance risks?
  3. What are the illicit finance risks related to non-fungible tokens?
  4. What are the illicit finance risks related to decentralized finance (DeFi) and peer-to-peer payment technologies?

B. AML/CFT Regulation and Supervision

  1. What additional steps should the United States government take to more effectively deter, detect, and disrupt the misuse of digital assets and digital asset service providers by criminals?
  2. Are there specific areas related to AML/CFT and sanctions obligations with respect to digital assets that require additional clarity?
  3. What existing regulatory obligations in your view are not or no longer fit for purpose as it relates to digital assets? If you believe some are not fit for purpose, what alternative obligations should be imposed to effectively address illicit finance risks related to digital assets and vulnerabilities?
  4. What regulatory changes would help better mitigate illicit financing risks associated with digital assets?
  5. How can the U.S. government improve state-state and state-federal coordination for AML/CFT regulation and supervision for digital assets?
  6. What additional steps should the U.S. government consider to combat ransomware?
  7. What additional steps should the U.S. government consider to address the illicit finance risks related to mixers and other anonymity-enhancing technologies?
  8. What steps should the U.S. government take to effectively mitigate the illicit finance risks related to DeFi?

C. Global Implementation of AML/CFT Standards

  1. How can Treasury most effectively support consistent implementation of global AML/CFT standards across jurisdictions for digital assets, including virtual assets and virtual asset service providers (VASP)?
  2. Are there specific countries or jurisdictions where the U.S. government should focus its efforts, through bilateral outreach and technical assistance, to strengthen foreign AML/CFT regimes related to virtual asset service providers?

D. Private Sector Engagement and AML/ CFT Solutions

  1. How can Treasury maximize public-private and private-private information sharing on illicit finance and digital assets?
  2. How can the U.S. Department of the Treasury, in concert with other government agencies, improve guidance and public-private communication on AML/CFT and sanctions obligations with regard to digital assets?
  3. How can Treasury encourage the use of collaborative analytics to address illicit financing risks associated with digital assets while also respecting due process and privacy?
  4. What technological solutions designed to improve AML/CFT and sanctions compliance are being used by the private sector for digital assets? Can these technologies be employed to better identify and disrupt illicit finance associated with digital assets and if so, how?
  5. Are there additional steps the U.S. Government can take to promote the development and implementation of innovative technologies designed to improve AML/CFT compliance with respect to digital assets?
  6. How can law enforcement and supervisory efforts related to countering illicit finance in digital assets better integrate private sector resources?
  7. How can Treasury maximize the development and use of emerging technologies like blockchain analytics, travel rule solutions, or blockchain native AML/CFT solutions, to strengthen AML/CFT compliance related to digital assets?
  8. How can financial institutions offering digital assets better integrate controls focused on fiat currency and digital asset transaction monitoring and customer identification information to more effectively identify, mitigate, and report illicit finance risks?

E. Central Bank Digital Currencies (CBDC)

  1. How can Treasury most effectively support the incorporation of AML/CFT controls into a potential U.S. CBDC design?

Letter to Credit Unions 22-CU-11
NCUA to Begin Phase 3 of Resuming Onsite Operations

NASCUS Legislative and Regulatory Affairs Department
September 20, 2022

On September 20, 2022, the National Credit Union Administration (NCUA) issued Letter to Credit Unions 22-CU-11 announcing its resumption of onsite examination and supervision activity in all locations.  This letter represents the implementation of Phase 3 of the transition into a post Covid-19 onsite supervision environment, with previous actions of Phase 1 announced through Letter 21-CU-06 (July 2021) and Phase 2 through Letter 22-CU-06 (April 2022).

Summary

Implementation of NCUA’s Phase 3 response will include the resumption of examination and supervision activity in all locations.  The letter outlines the intent of the NCUA to continue to utilize appropriate offsite review processes developed during the pandemic when those processes can be completed efficiently and effectively as part of a hybrid examination process.

Further, NCUA outlines it will continue to consider challenges a credit union faces as they schedule examinations and scope the onsite and offsite portions of an examination.

The agency also outlined that the health and safety of agency and credit union staff will be paramount in its decision making and NCUA staff are generally expected to comply with credit unions policies to the extent they exceed the NCUA’s Phase 3 safety protocols and do not conflict with local, state, or federal laws, infringe on employee rights or restrict access to a credit unions books and records.  NCUA will continue to coordinate with State Supervisory Agencies when working onsite in FISCUs.

The agency also announced that while its offices are generally open to the public, they will continue to operate under heightened safeguards.  Finally, the letter states NCUA will continue to closely monitor the pandemic environment for further appropriate action to address any potential challenges that may arise and any changes to the NCUA’s stance will be publicly announced as enacted.

Letter to Credit Unions 22-CU-10
Simplified CECL Tool for Credit Unions

NASCUS Legislative and Regulatory Affairs Department
September 15, 2022

On September 14, 2022, NCUA issued Letter to Credit Unions 22-CU-10, Simplified CECL Tool for Credit Unions, to provide a tool to assist small credit unions with determining their allowance for credit losses (ACL) on loans and leases as required under Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses, referred to as Current Expected Credit Losses (CECL). The tool is designed for credit unions with less than $100 million in assets. NCUA notes the tool can be used by larger credit unions based on the discretion of their management and auditors. The CECL Tool includes functionality for a credit union to calibrate assumptions to its circumstances.

The CECL Tool and its supporting documentation are available on the NCUA’s CECL Resources page.

The letter includes links to the following resources:

Summary

The CECL Tool, which utilizes the Weighted Average Life Maturity (WARM) methodology, is one of many options available for credit unions to calculate the ACL as required under CECL.  The WARM methodology represents one acceptable approach for smaller, less complex pools of assets, however, NCUA states that each credit union should determine which approach best fits its portfolio.

The tool calculates the ACL for a loan portfolio category by multiplying the period-end loan portfolio balance, the average annual charge-off rate, and the WARM factor (Appendix A). Loan portfolio categories parallel those in the NCUA Call Report (Appendix B). The tool also provides the related WARM factor derived from loan-level data of like-sized credit unions and vetted to provide a relevant factor for each loan portfolio category. Credit unions are directed to Appendix C to adjust the charge-off rate and the WARM factor using qualitative factors.

The letter directs credit unions and their auditors to the Frequently Asked Questions and Model Development Documents for rationale, assumptions and other analyses that support the tool’s use for calculating the allowance for credit losses on loans and leases.

The CECL Tool’s data will be updated each quarter-end, beginning September 30, 2022, to provide updated WARM factors that reflect current market conditions.

NCUA stresses that the letter and tool do not constitute legal, or accounting advice and credit unions should consult with their accounting advisors in order to determine whether the tool is appropriate for use in determining the allowance for credit losses on loans and leases, due to the unique make up of each institution.

Letter to Credit Unions 22-CU-09 and Supervisory Letter 22-01 
NCUA Updates to Interest Rate Risk Supervisory Framework

NASCUS Legislative and Regulatory Affairs Department
September 3, 2022

NCUA has issued Letter to Credit Unions 22-CU-09 Updates to Interest Rate Risk Supervisory Framework to alert credit unions to guidance the agency provided its examination staff to regarding changes to NCUA’s interest rate risk (IRR) supervisory framework. The guidance issued to NCUA examiners, SL No. 22-01, discussed 4 primary changes to NCUA’s IRR supervisory framework:

  1. Revising the risk classifications by eliminating the extreme risk classification and modifying the high risk classification;
  2. Clarifying when a Document of Resolution (DOR) to address IRR is warranted, including removing any presumed need for a DOR based on an IRR supervisory risk classification and related need for a credit union to develop a de-risking plan;
  3. Providing examiners more flexibility in assigning IRR supervisory risk ratings; and
  4. Revising examination procedures to incorporate updated review steps when assessing how a credit union’s management of IRR is adapting to changes in the economic and interest rate environment.

NCUA’s new guidance amends the framework established in LTCU 16-CU-08, Revised Interest Rate Risk (IRR) Supervision, (January 1, 2017) and outlined in the Examiner’s Guide.

Acronym Glossary:

ENT = estimated NEV tool

IRR = interest rate risk

NEV = net economic value

NCUA’s rules for credit union management of interest rate risk are found in Part 741.3(b) and its Appendix A.

Summary

The revisions to the IRR framework of the NCUA Examiner’s Guide outlined in Supervisory Letter 22-01 apply to institutions over $50 million and include:

  1. Revising the risk classifications by eliminating the extreme risk classification and modifying the high risk classification;

Under the revised NEV test system only three classifications would be used:  Low, Moderate and High. The Extreme classification is being eliminated.  The three risk classifications will continue to determine the scope of examination review steps.

The proposed framework would eliminate the “Extreme” classification under the NEV Test by recognizing any Post-shock NEV less than 4% or any NEV Sensitivity greater than 65% as “High”.  Previously Post Shock NEV below 2% or NEV Sensitivity above 85% would have been classified as “Extreme”.

  1. Clarifying when a Document of Resolution (DOR) to address IRR is warranted, including removing any presumed need for a DOR based on an IRR supervisory risk classification and related need for a credit union to develop a de-risking plan;

The updated framework clarifies that a DOR is not required for any NEV Test or ENT risk classification alone (i.e. just because risk classification is considered high).  Similarly, a credit union would NOT be expected to have a plan of action based SOLELY on a “High” classification. Rather, the need for a DOR would be determined on a case-by-case basis.

NCUA provides several examples of situations that WOULD warrant a DOR:

  • The level of IRR represents an undue risk to the Share Insurance Fund, and the credit union is not taking appropriate and prompt action to address;
  • Lack of adequately updating an approach to managing interest rate, liquidity, and related risks for the current market conditions by high risk classified credit unions;
  • Material governance deficiencies are noted relating to the identification, measurement, monitoring and/or control of IRR by any credit union
  1. Providing examiners more flexibility in assigning IRR Supervisory risk ratings;

Assignment of the IRR rating will continue to be based on the quantitative NEV Test or ENT but may be improved, or worsened, by other factors.  The guidance points out that upgrading a rating would be unusual for an examiner and would most often result from borderline moderate- to high-risk classifications.

  1. Revising examination procedures to incorporate updated review steps when assessing how a credit union’s management of IRR is adapting to changes in the economic and interest rate environment.

Examiners will continue to use the IRR Workbook as a job aid when reviewing IRR.  However, a new resource table (High IRR Job Aid) will be used to mitigate the impact of the current IRR and economic volatility environments.  The new job aid will integrate with the current job aid when applicable and be used to help identify the specific source of the high IRR, risk management and controls weaknesses and measure the potential impact on earnings and capital.  Institutions over $10 billion will require all review steps in the IRR Workbook regardless of the risk classification category.

Additionally, the framework will include steps to assess the extent of a credit union’s use of third-party vendors and their ability to understand the information provided by such a vendor.

Joint Policy Statement Summary:
Prudent Commercial Real Estate Loan Accommodations and Workouts

NASCUS Legislative and Regulatory Affairs Department
August 4, 2022

The NCUA, FDIC, and OCC have published a joint policy statement on Prudent Commercial Real Estate Loan Accommodations and Workouts.  If finalized, the policy statement would address supervisory expectations related to commercial real estate risk management elements, loan classifications, regulatory reporting, and accounting considerations by updating existing interagency guidance, provide updated examples of classifications and income property valuation methodologies and address relevant accounting changes on loss estimates in Generally Accepted Accounting Principles (GAAP).

The deadline to submit a comment is October 3, 2022. The proposed rule may be read in its entirety here.

In the request for comments, the agencies seek responses to the following questions:

  • Question 1: To what extent does the proposed Statement reflect safe and sound practices currently incorporated in a financial institution’s CRE loan accommodations and workout activities? Should the agencies add, modify, or remove any elements, and, if so, which and why?
  • Question 2: What additional information, if any, should be included to optimize the guidance for managing CRE loan portfolios during all business cycles and why?
  • Question 3: Some of the principles discussed in the proposed Statement are appropriate for Commercial and Industrial (C&I) lending secured by personal property or other business assets.  Should the agencies further address C&I lending more explicitly, and if so, how?
  • Question 4: What additional loan workout examples or scenarios should the agencies include or discuss?  Are there examples in Appendix 1 of the proposed statement that are not needed, and if so, why not?  Should any of the examples in the proposed Statement be revised to better reflect current practices, and if so, how?
  • Question 5: To what extent do the TDR examples continue to be relevant in 2023 given that ASU 2022-02 eliminates the need for a financial institution to identify and account for a new loan modification as a TDR.

Summary

On October 30, 2009, the agencies along with the Board of Governors of the FRB, FFIEC State Liaison Committee, and the former Office of Thrift Supervision, adopted the Policy Statement on Prudent Commercial Real Estate Loan Workouts, which was issued by the FFIEC to help examiners and financial institutions understand risk management and accounting practices for CRE loan workouts.

The proposed updates incorporate recent policy guidance on loan accommodations and accounting developments for estimating loan losses.

  • Outlining principle-based supervisory expectations to facilitate and underscore the importance of working constructively, in a prudent manner with CRE borrowers who are experiencing financial difficulties.
  • Promote consistent examination treatment of related loans throughout the system.
  • Reflect changes in GAAP since 2009, including those in relation to current expected credit losses (CECL)
  • Distinguish the difference between GAAP credit loss measurement and Supervisory classifications.
  • Provide reference information on GAAP without providing guidance on a matter outside Regulator purview.

Proposed changes include:

  • A new section on short-term loan accommodations.
  • Distinguishing between short-term/less complex loan accommodations and longer-term/more complex accommodations.
  • Providing information resources related to accounting changes.
  • Providing new guidance on several methodologies to value income CRE collateral.

Further, the proposed Policy statement seeks guidance on the appropriateness of TDR guidance within the Statement given the upcoming implementation of ASU 2022-22 (12/23), eliminating the requirement for financial institutions to report TDRs, if the Policy Statement should also be applied to C&I loans or if additional loan workout examples or guidance would be helpful.

NASCUS note: The publication of the Statement seems to indicate regulatory agencies are preemptively addressing concerns that CRE loans (particularly collateral values) could become problematic, such as during the downturn in the late 2000s that precipitated significant financial institution failures.

NASCUS note: FCUs under $10 million are not required to comply with GAAP.  Some states also have similar provisions with a base of various asset sizes.

NASCUS note: While federal bank regulators clearly follow FFIEC loan classification standards of substandard, doubtful and loss staff are unaware of individual loss classifications methodology relating to NCUA and believes many state regulators also do not regularly perform loan classifications for loss.  The policy statement makes clear that losses for accounting treatment and regulatory capital purposes can and sometimes should be different.

Final Rule Summary: Asset Threshold for Determining the Appropriate Supervisory Office;
Office of National Examinations and Supervision (ONES)

NASCUS Legislative and Regulatory Affairs Department
August 3, 2022

The NCUA Board is amending its regulations to revise the $10 billion asset threshold used for assigning supervision of consumer federally insured credit unions (FICUs) to the Office of National Examinations and Supervision (ONES). The rule does not alter any regulatory requirements for covered credit unions. The rule only applies to FICUs whose assets are $10 billion or more. The rule provides that covered credit unions with less than $15 billion in total assets, referred to as Tier I credit unions, will be supervised by the appropriate NCUA Regional Office. Credit unions with $15 billion or more in total assets, considered Tier II and Tier III, will continue to be supervised by ONES.

The final rule is effective January 1, 2023, and can be found in its entirety here.

Summary

In 2012 NCUA established ONES and reorganized the central and field office structure. As part of this restructuring, NCUA transferred the responsibility for supervising covered credit unions to ONES from the respective regional offices. Initially, a covered credit union was transferred to ONES on January 1, 2014. Annually, thereafter, FICUs newly reporting assets of $10 billion or more on March 31 of a given calendar year are reassigned on the first day of the following calendar year.

As a requirement of NCUA Part 702 consumer credit unions of a certain size are subject to capital planning and stress testing requirements. A covered credit union for purposes of ONES is a FICU whose assets are $10 billion or more. Covered credit unions are then divided into three asset tiers:

Tier I – Less than $15 billion in total assets

Tier II – $15 billion or more in total assets, but less than $20 billion in total assets

Tier III – $20 billion or more in total assets

Under the final rule, credit unions considered Tier II or Tier III remain subject to ONES supervision. The final rule does not assign Tier I credit unions to ONES supervision. Tier I credit unions will remain subject to Regional Office supervision until they become a Tier II. Additionally, all covered credit unions remain subject to enhanced capital planning and stress testing.

Grandfathered Covered Credit Unions

 It is important to note, that under the proposed rule, Tier I credit unions that were supervised by ONES were grandfathered and remained subject to ONES supervision. The Board finalized the rule WITHOUT the grandfather clause for Tier I credit unions already supervised by ONES, stating this provision has become unnecessary. All credit unions currently supervised by ONES have reported assets of $15 billion or more as of March 31, 2022. Therefore, all credit unions assigned to ONES will be categorized as Tier II or Tier III effective January 1, 2023, and will remain with ONES under this final rule.

Data Collection and Coordination

As previously noted, under the final rule, all covered credit unions remain subject to enhanced capital planning and stress testing data collections. Data collection is part of NCUA’s strategic initiative to enhance supervision and issued to inform qualitative and quantitative assessments of covered credit unions The Board does not believe the data collection presents an undue burden to covered credit unions as the data is the type of information the Board expects covered credit unions to be analyzing and considering regardless of whether NCUA collects the information.

The final rule notes that ONES will manage the data collection process for all Tier I credit unions and that ONES will be the point of contact for resolving any data collection issues, in collaboration with the assigned Regional office.

Examinations

The Board intends for the coordination between ONES and the Regional offices to be ongoing. ONES is providing a capital plan training program to Regional offices to ensure consistency of review across NCUA. The scope of Regional office examinations will remain consistent with the scope of ONES’ examinations as both officers are subject to the same national examination standards, therefore, the Board does not expect the review of capital plans or general supervision of Tier I credit unions to be different under the Regional offices.

Reservation of Authority

The final rule addresses the Board’s existing reservations of authority under Part 702 and designates a FICU as subject to ONES or Regional office supervision, or a Tier I, II, or III credit union. For example, the Board may use this authority to subject a Tier I credit union that would otherwise be supervised by a Regional office to ONES supervision or exercise its authority by subjecting a Tier II to Regional office supervision. Independent of the authority to designate a supervisory office, the Board may also use this authority to designate a credit union as a Tier I, II, or III.

The final rule also states that the Board does not believe an express requirement to consult and cooperate with state regulators is necessary before transferring a Tier I federally insured state-chartered credit union (FISCU) to ONES, it expects consultation with state regulators would occur prior to exercising its authority under the final rule.

CFPB Summary re: Fair Credit Reporting: Permissible Purposes for Furnishing, Using, and Obtaining Consumer Reports

12 CFR Part 1022

The Consumer Financial Protection Bureau (CFPB) is issuing this advisory opinion to outline certain obligations of consumer reporting agencies and consumer report users under Section 604 of the Fair Credit Reporting Act (FCRA).  The opinion explains that the permissible purposes listed in FCRA Section 604(a)(3) are consumer specific, and it affirms that a consumer reporting agency may not provide a consumer report to a user under FCRA Section 604(a)(3) unless it has reason to believe that all of the consumer report information it includes pertains to the consumer who is the subject of the user’s request.  The Bureau notes that disclaimers will not cure a failure to have a reason to believe that a user has a permissible purpose for a consumer report provided pursuant to FCRA Section 604(a)(3). The advisory opinion also reminds consumer report users that FCRA Section 604(f) strictly prohibits a person who uses or obtains a consumer report from doing so without a permissible purpose.

The advisory opinion became effective on July 12, 2022 and can be found here.

Summary:

The FCRA regulates consumer reporting.  Congress enacted the statute to ensure fair and accurate credit reporting, promote efficiency in the banking system and protect consumer privacy.  A major purpose of the FCRA is the privacy of consumer data.

The FCRA protects consumer privacy data in multiple ways, including by limiting the circumstances under which consumer reporting agencies may disclose consumer information.  Section 604 identifies an exclusive list of “permissive purposes” for which consumer reporting agencies may provide consumer reports, including in accordance with the written instructions of the consumer to whom the report  relates and for purposes relating to credit, employment and insurance.  The statute states that a consumer reporting agency may provide consumer reports under these circumstances and no other. In addition, FCRA Section 607(a) requires that “every consumer reporting agency shall maintain reasonable procedures designed to…limit the furnishing of consumer reports to the purposes listed under Section 604.  Section 620 imposes criminal liability on any officer or employee of a consumer reporting agency who knowingly and willfully provides information concerning an individual from the agency’s files to an unauthorized person.

In addition, the FCRA limits the circumstances under which third parties may obtain and use consumer report information from consumer reporting agencies.  FCRA Section 604(f) provides that “a person shall not use or obtain a consumer report for any purpose unless the consumer report is obtained for a purpose for which the consumer report is authorized to be furnished and the purpose is certified in accordance with the FCRA Section 607 by a prospective user of the report through a general or specific certification.  FCRA Section 619 imposes criminal liability on any person who knowingly and willfully obtains information on a consumer from a consumer reporting agency under false pretenses.

NCUA Letter to Credit Unions 22-CU-08: Risk-Based Approach to Assessing Customer Relationships and Conducting Customer Due Diligence

NCUA has issued LTCU 22-CU-08  as part of a joint statement with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of Currency and the U.S. Department of Treasury’s Financial Crimes Enforcement Network (collectively, the Agencies).

The joint statement clarifies NCUA’s position that credit unions must take a risk-based approach in assessing individual member risk.  It also reinforces the NCUA’s position that no single customer type automatically presents a high risk of money laundering, terrorist financing, or other illicit financial activity risk.  NCUA also advises against refusing or discontinuing service to an entire class of members based on perceived risk. The Joint Statement refers to the examples of customer (member) types listed in the CDD section of the Federal Financial Institutions Examination Council (FFIEC) Bank Secrecy Act/Anti-Money Laundering Examination Manual, including, independent ATM owners or operators, nonresident aliens and foreign individuals, charities and nonprofit organizations, professional service providers, cash intensive businesses, nonbank financial institutions, and customers the bank considers politically exposed persons. The agencies reiterate that banks and credit unions should make their own business decisions on business relationships based on their own due diligence.

This statement does not include any changes to the Bank Secrecy Act (BSA) regulations but rather supports the long-standing approach to CDD outlined in the BSA as well as the Federal Financial Institution Examination Council’s BSA/AML Examination Manual.

 

 

CFPB Summary re: Advanced Notice of Proposed Rulemaking regarding Credit Card Late Fees and Late Payments
12 CFR Part 1026

The Consumer Financial Protection Bureau (CFPB) is seeking information from credit card issuers, consumer groups, and the public regarding credit card late fees and late payments, and card issuers’ revenue and expenses.  For example, the Bureau is seeking information relevant to certain provisions related to credit card late fees in the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) and Regulation Z.  Areas of inquiry include: factors used by card issuers to set late fee amounts; card issuers’ costs and losses associated with late payments; the deterrent effects of late fees; cardholders’ late payment behavior; methods that card issuers use to facilitate or encourage timely payments, including autopay and notifications, harbor provisions in Regulation Z; and card issuers’ revenue and expenses related to their domestic consumer credit card operations.

Comments on the ANPRM are due by July 22, 2022.  The ANPRM can be found here.

Summary:

The Bureau is charged with monitoring for risks to consumers in the offering or provision of consumer financial products/services.  Specifically, Section 149(a) of the CARD Act provides that the amount of any penalty fee or charge that a card issuer may impose with respect to a credit card account (under an open-end consumer credit plan) in connection with any omission with respect to, or violation of, the cardholder agreement, including any late payment fee, over-the-limit fee or any other penalty fee or charge, must be reasonable and proportional to such omission or violation. Section 149(b) of the Act directs the Bureau to issued rules that establish standards for assessing whether the amount of any penalty fee or charge is reasonable and proportional to the omission or violation to which the fee or charge relates.  In issuing such rules, the Act requires the Bureau to consider: (i) the cost incurred by the creditor from an omission or violation; (ii) the deterrence of omissions or violations by the cardholder; (iii) the conduct of the cardholder; and (iv) such other factors that the Bureau may deem necessary or appropriate.

The Act authorizes the Bureau to establish different standards for different types of fees/charges and authorizes the Bureau (in consultation with other agencies) to provide an amount for any penalty fee or charge that is presumed to be reasonable and proportional to the omission/violation to which the fee relates.

Section 1026.52 of Regulation Z, which implements the CARD Act, states that a card issuer must not impose a fee for violating the terms or other requirements of a credit card account, including a late payment, 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 that is consistent with Section 1026.52.  This section sets forth a safe harbor of $30 generally  for a late payment, except that it sets forth a safe harbor of $41 for each subsequent late payment within the next six billing cycles.  The safe harbor dollar amounts are subject to an annual inflation adjustment.  A card issuer is not required to use the cost analysis to determine the amount of late fees if it complies with the safe harbor amounts.

Questions Asked

The questions in this notice cover several areas relating to the statutory and regulatory provisions, as well as areas relating more generally to the domestic consumer credit card market.  Areas of inquiry include: factors used by card issuers to set late fee amounts, including but not limited to statutory factors described above; card issuers’ costs and losses associated with late payments; the deterrent effects of late fees; cardholders’ late payment behavior; methods that card issuers use to facilitate or encourage timely payments, including autopay and notifications; card issuers’ use of the late fee safe harbor provisions in Regulation Z; and card issuers’ revenue and expenses related to their domestic consumer credit card operations.  In answering the questions, card issuer commenters should base their answers on information relevant to their domestic consumer credit card portfolios.  Other commenters should base their answers on information they have about the domestic consumer credit card market.

Questions are divided among the following categories:

  • Factors used by card issuers to set existing levels of late fees
  • Costs and Losses
  • Deterrence
  • Cardholder Behavior
  • Autopay
  • Notifications of Upcoming Due Date
  • Courtesy Periods and Fee Waivers
  • Staggered Late Fee
  • Safe Harbor Provisions
  • Cost Analysis Provisions
  • Revenue and Expenses