Dec. 20, 2019 NASCUS Report

THIS WEEK: Key senator turns cool to cannabis banking; Bills repeal parking tax, call for CECL study … another puts kibosh to banks free on base; Letter seeks balance on credit risk review; CUs see positive income, but slow membership growth; IG details info security proposals; Summaries look at HMDA, screening for loan originators; CFPB issues more TRID guidance; BRIEFLY: noncash payments continue growth; no NR next week – happy holidays!

Senator wants more input on cannabis banking

In apparently a shift from skepticism to downright chilliness, a key Senate leader is now voicing no support for legislation that would bar federal financial institution regulators from taking actions against credit unions and banks serving legal cannabis-related businesses solely because the institutions are providing services to the businesses – at least until he receives more information.

In a statement this week, Senate Banking Committee Chairman Mike Crapo (R-Idaho), said he did not support the Secure and Fair Enforcement (SAFE) Banking Act (H.R. 1595), which passed the House in September on a 321-103 bipartisan vote. Crapo said he is requesting public input on public health and money laundering concerns related to cannabis banking, while also saying he is “firmly opposed” to legalizing marijuana on the federal level, and in his home state.

Significant concerns remain that the SAFE Banking Act does not address the high level potency of marijuana, marketing tactics to children, lack of research on marijuana’s effects, and the need to prevent bad actors and cartels from using the banks to disguise ill-gotten cash to launder money into the financial system,” Crapo said. “I welcome input from all interested parties on how to thoughtfully address these concerns.”

In September, after the House approved the H.R. 1595, Crapo said that he expected “good support” for the legislation in the Senate. However, at the beginning of this month, he said “we don’t have the politics yet where we can actually do a markup and pass a bill and be able to get the votes on the floor,” Crapo said. “I’m working on it.”

As passed by the House, H.R. 1595 would prohibit penalizing, or discouraging a credit union or bank from providing financial services to (first) a cannabis-related legitimate business or (second) to a state (and its political subdivisions or Indian Tribe) that exercises jurisdiction over cannabis-related legitimate businesses.

NASCUS strongly supports legislation to make it permissible for credit unions to serve state-authorized cannabis businesses and third-party outlets. However, NASCUS takes no position on legalization of marijuana.

Meanwhile, preceding Crapo’s statement, credit union and bank trade groups had written to Crapo and Banking Committee Ranking Member Sherrod Brown (D-Ohio) late last week urging them to move forward on the SAFE Banking Act. The groups noted the bipartisan House vote and “the first time in history that any Congress voted on meaningful cannabis reform legislation.”

Chairman Crapo Outlines Concerns with Cannabis Banking Legislation

Bills repeal ‘parking tax,’ call for CECL study …

Racing to pass appropriations legislation to keep the government funded by the deadline of midnight tonight (Friday), the Senate and House this week approved broad spending and tax bills that also contain a number of other provisions – including repeal of the so-called “parking tax” and a study of the impact on financial institutions of accounting standards addressing current expected credit losses (CECL). The $1.4 trillion spending agreement is on its way to President Donald Trump, who is set to sign the measures into law.

H.R. 1865 (the Further Consolidated Appropriations Act for FY 2020) repeals the 21% unrelated business income tax (UBIT) on certain employee fringe benefits, including parking and transit expenses, paid by non-profits (such as credit unions) for their employees. The measure repeals a provision from the 2017 tax cut legislation (the Tax Cuts and Jobs Act (TCJA)).

The repeal is significant for state-chartered credit unions. UBIT was originally designed to apply to income—not expenses. A repeal removes the precedent of applying UBIT to expenses at non-profits.  Also, a repeal retains equal treatment between federal and state chartered credit unions with respect to employee parking and transit expenses.

Meanwhile, the Senate report on another of the bills (H.R. 1158, the Consolidated Appropriations Act for Fiscal Year 2020) calls on the Treasury Department – consulting with NCUA, the FDIC, Federal Reserve, and the OCC — to “conduct a study on the need, if any, for changes to regulatory capital requirements necessitated by CECL, and to submit the study to the Committee within 270 days of the date of enactment of this act.” That would put the due date no later than end of the third quarter of 2020.

…while another puts kibosh on cost-free banks on base

Legislation funding the military and national defense is also headed to the president for his signature – but without a provision that would have allowed some banks to obtain cost waivers to operate on military installations. Credit union trade groups (including the Defense Credit Union Council (DCUC) and the Credit Union Natl. Assn. (CUNA)) had been working to remove the provision, which had been added by the banking industry early in the appropriations process. The credit union advocates argued that that for-profit banks should not be granted the same rent-free access afforded to non-profit credit unions under certain conditions.

NASCUS seeks ‘regulatory balance’ on credit risk review

Regulatory balance could be improved in proposed guidance on credit risk review systems by providing credit unions and other institutions more flexibility – and by offering more clarity, NASCUS wrote in a comment letter this week.

In commenting on proposed joint credit risk review guidance from NCUA and the three federal banking agencies – which aims to outline the key elements of a credit risk review system and the effective characteristics of a credit risk rating system – NASCUS urged NCUA to consider three issues: clarification of expectations related to uniform ratings systems and federally insured credit unions; additional options for monitoring and reviewing credit risk; and consideration of a “risk-focused” approach to credit risk review systems.

On clarifying expectations, NASCUS urged the agency to state explicitly whether the proposed guidance requires credit unions to adopt a uniform classification system or otherwise deviate from existing credit union specific guidance issued by NCUA. “As we read the proposed Guidance, it does not appear NCUA intends to require credit unions to change current practices and adopt a uniform classification system,” NASCUS wrote.

On additional options, NASCUS noted that modest-sized credit unions have limited access to qualified, independent personnel available to serve as credit risk review staff, as required under the guidance. “If in fact that is the only effective risk mitigation structure acceptable from a supervisory perspective, NASCUS would like to see a more detailed discussion and analysis of the performance of Credit Risk Review efforts as currently conducted in modest-sized credit unions,” the association wrote.

On a risk-focused approach, the association recommended that the agency consult with state regulators, and talk to stakeholders, as to whether a risk-focused approach to the Credit Risk Review process could be incorporated into the guidance. “For example, while experience with a portfolio might trigger more frequent reviews, might experience with specific loans or portfolios be grounds for less frequent reviews,” NASCUS wrote. “If the proposed Guidance is confirmed to require third party reviews in smaller credit unions, allowing for periodic rather than annual reviews might result in significant resource savings for those institutions.”

NASCUS Comment: Interagency Guidance on Credit Risk Review Systems

9 in 10 CUs had positive net income, while membership lags

About 89% of all federally insured credit unions had positive net income during the first three quarters of the year — but all credit unions in Alaska, Maine, Nevada, New Hampshire and Vermont had positive net earnings, NCUA said this week. In its “Quarterly U.S. Map Review, Third Quarter 2019,” the agency also noted that the median annualized return on average assets at the credit unions was 65 basis points during the first three quarters of the year, compared to 60 bp during the first three quarters of 2018. New Mexico credit unions had the highest median annualized return on average assets during the period (99 bp), followed by credit unions in South Carolina (94 bp).

The report also points out that while overall membership at the credit unions grew during the one-year ending Sept. 30, it did so at only 0.1% at the median. Overall, NCUA said, nearly half of federally insured credit unions had fewer members at the end of the third quarter 2019 than they did a year earlier. “Credit unions with falling membership tend to be small; about 70% had less than $50 million in assets,” NCUA reported.

The agency said that in 18 states and Washington, D.C., median membership growth was negative. At the median, membership declined the most in Pennsylvania (-1.4%) and Illinois (-1% ). Membership was unchanged in Louisiana, Maryland, and West Virginia. On the other hand, credit unions posting the highest median membership growth rates were in Alaska (2.4%) and Wyoming (2.2%).

Meanwhile, assets growth at the credit unions, the agency said, for the year ending Sept. 30, 2019 was 1.9% — a bit higher compared to the same period of a year earlier (1.8%). However, the agency pointed out that at least two states saw assets recede during the period, with New Jersey credit unions dropping by -1.2% in median asset growth, and Connecticut credit unions by -0.3% in median asset growth. Median asset growth was highest in Idaho (7.8%), followed by Wyoming (5.9%), the agency said.

NCUA: Q3 2019 State Credit Union Data Report Now Available

NCUA IG details info security recommendations

Fifteen recommendations for strengthening NCUA’s information security program are detailed in a fiscal 2019 inspector general report on the agency’s compliance with the Federal Information Security Modernization Act (FISMA). The report was released last week.

The 15 recommendations include two that are outstanding from last year’s FISMA report.

FISMA requires agencies to develop, implement, and document an agency-wide information security program and practices. It also requires inspectors general (IG) to conduct an annual independent evaluation of their agencies’ information security programs and report the results to the Office of the Management and Budget (OMB).

The fiscal 2019 report for NCUA was conducted by CliftonLarsenAllen LLP, which was engaged to help the NCUA IG to assess the agency’s compliance with FISMA and agency information security and privacy policies and procedures.

We concluded that the NCUA has, for the most part, formalized and documented its policies, procedures, and strategies; however, the NCUA faces certain challenges in the consistent implementation of its information security program and practices,” according to an executive summary of the report. “We identified weaknesses in five of the eight domains of the FY 2019 IG FISMA Reporting Metrics related to risk management, configuration management, identity and access management, data protection and privacy, and information security continuous monitoring.”

The “domains” noted in the report refer to the eight domains over which 67 objective questions are divided under the FY 2019 IG FISMA Metrics. Those eight domains, which correspond to five security functions, include the above-noted domains plus security training, incident response, and contingency planning.

The report says these control weaknesses affect the agency’s ability to preserve the confidentiality, integrity, and availability of NCUA information and information systems, “potentially exposing them to unauthorized access, use, disclosure, disruption, modification, or destruction,” the report says.

NCUA management concurred with the recommendations and provided a plan for implementing them, with the corrections slated at points throughout calendar 2020.

Report #OIG-19-10 (Dec. 12, 2019)

Summaries look at HMDA exemption, loan originators

Summaries of CFPB actions on temporary Home Mortgage Disclosure Act (HMDA) exceptions for smaller institutions, and on screening and training requirements for mortgage loan originators with temporary authority, are now posted on the NASCUS website. The summaries are available for members only.

In October, the bureau announced a two-year extension of a current, temporary threshold suspending the collection and reporting data about open-end lines of credit for certain, smaller mortgage lenders to Jan. 1, 2022. The extension applies to financial institutions that originated less than 500 open-end lines of credit for reporting purposes under the Home Mortgage Disclosure Act (HMDA). For data collection years 2020 and 2021, those institutions originating fewer than 500 open-end credit lines in either of the two preceding calendar years will not need to collect and report data with respect to open-end lines of credit, according to CFPB.

In November, CFPB finalized a rule clarifying that an employer of loan originators with temporary authority is not required to conduct screening and ensure the training of the temporaries. The bureau said individual states will perform the screening and training as part of the review of an individual’s application for a state loan originator license. The category of “loan originators with temporary authority to originate loans” was established by the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA, S.2155).

According to the agency, loan originators with temporary authority are those who were previously registered or licensed, are employed by a state-licensed mortgage company, are applying for a new state loan originator license, and meet other criteria specified in the statute. According to CFPB, loan originators with temporary authority may act as a loan originator for a temporary period of time, as specified in the statute, in a state while that state considers their application for a loan originator license.

The interpretive rule represents a departure for screening and training for the other two categories of loan originators: those working for state-licensed mortgage companies and those working for federally regulated financial institutions.

Summary: Final Rule re: Home Mortgage Disclosures Act’s (HMDA) Temporary Exceptions for Smaller Institutions

Summary: Interpretive Rule re: Truth in Lending (Regulation Z) Screening and Training Requirements for Mortgage Loan Originators with Temporary Authority

Bureau issues more construction-loan TRID guidance

Additional guidance related to disclosing construction and construction-permanent loans under federal lending and real estate disclosure rules was released by CFPB as it published two guides to the construction loans disclosures under the TILA-RESPA Integrated Disclosure (TRID) Rule.

One (the “combined guide”) provides guidance for disclosing the loan phases together. The other (the “separate guide”) provides guidance for disclosing the phases separately, the bureau said.

“The Construction Guides are not a complete review of the TRID Rule, but instead highlight particular sections of the disclosures based on the questions received by the Bureau,” the agency said of the combined guide. “At the end of this Guide, there is more information about the TRID Rule and related implementation support from the Bureau that can support any of the other pieces not addressed by these guides.”

The bureau noted that two concepts affect how the TRID Rule applies to construction loans. The first, CFPB said, is whether the creditor chooses to use combined disclosures, as discussed in this Guide, or separate disclosures, as discussed in the Companion Guide. The second is whether the creditor chooses to use Appendix D to Regulation Z to estimate certain disclosures, the agency said.

TILA-RESPA Integrated Disclosures for Construction Loans

BRIEFLY: Noncash payments continue to grow; Happy holidays – and NASCUS Report takes a week off

Fast growth in the overall use of “core” noncash payment types – credit and debit cards, automated clearinghouse (ACH) system, and checks – is continuing, the Federal Reserve reported this week. According to the Fed’s 2019 payments study, per-year growth in the number of core noncash payments totaled 6.7% between 2015 and 2018. That growth outpaced the 5.1% yearly growth reported in a previous study covering the period between 2012 to 2015 … NASCUS Report takes a break next week in observance of the holidays; publication will resume, as per usual, Jan. 3. Best holiday wishes, and see you next year!

Federal Reserve payments study finds growth in card and automated clearinghouse payments

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