Compliance Update with Amy K
by Amy Kleinschmit
Chief Compliance Officer

NCUA Supervisory Priorities Announced

The National Credit Union Administration (NCUA) recently issued their 2021 Supervisory Priorities. Be sure to review these priorities in advance of your next exam – in other words, this will be on the next test.

With regard to ALLL, the letter notes that NCUA examiners will not be assessing credit unions’ efforts to transition to the CECL standard until further notice. However, expect examiners to still evaluate the adequacy of credit unions’ ALLL accounts by reviewing:

  • ALLL policies and procedures;
  • Documentation of an ALLL reserving methodology, including modeling assumptions and qualitative factor adjustments;
  • Adherence to generally accepted accounting principles; and
  • Independent reviews of credit union reserving methodology and documentation practices by the Supervisory Committee or by an internal or external auditor.

Bank Secrecy Act is again on the list of supervisory priorities, with a focus on the following areas:

  • Customer due diligence and beneficial ownership procedures;
  • Proper filing of SARs and CTRs;
  • Reviews of bi-weekly 314(a) information requests from FinCEN.

The NCUA will also be reviewing compliance with the CARES Act and Consolidated Appropriations Act in terms of proper categorization of loan modifications; requirements for financial institutions related to the administrative provisions for the additional 2020 recovery rebates for individuals. In addition, NCUA examiners will continue to review, as needed, modifications, credit reporting, forbearances, and foreclosures that were conducted in 2020 under CARES Act provisions.

With regard to consumer financial protection, examiners will focus on Fair Lending and areas related to the COVID-19 pandemic. Examiners will assess a credit union’s Fair Lending Compliance Management System. Reviews will include areas such as board and management oversight, policies and procedures, training, monitoring and corrective action, and member complaint response.

Credit risk management is also on the list of priorities. Expect examiners to review underwriting standards and credit risk-management procedures. The letter provides that, “NCUA examiners will focus on any adjustments credit unions made to lending programs to address borrowers facing financial hardship because of the COVID-19 pandemic.” This will include a review of policies related to loan workout strategies, risk-management practices, and new strategies implemented to provide funds to borrowers impacted by the COVID-19 pandemic, including programs that were authorized under the CARES Act and extended in the Consolidated Appropriations Act, 2021. In particular, NCUA examiners will evaluate credit unions’ controls, reporting, and tracking of these programs.

Cybersecurity continues to be a priority. The NCUA is transitioning to an Information Technology Risk Examination for Credit Unions (InTREx-CU) which it will continue to use in 2021.

LIBOR Transition – what is the credit union’s plan? Credit unions that have LIBOR-based transactions or contracts should not delay their preparations for transitioning away from this interest rate benchmark.

Liquidity Risk – given the level of economic uncertainty, the NCUA encourages credit unions to broaden the range of possible scenarios used in their financial projections. NCUA examiners will evaluate the suitability and scope of a credit union’s scenario analysis for liquidity risk management. 

Hemp – if your credit union is serving the hemp industry, make sure you under the complexities and risks involved and secure the necessary expertise and resources to conduct this activity safely and soundly and in compliance with all applicable laws and regulations.


FinCEN SAR FAQs Issued

The Financial Crimes Enforcement Network (FinCEN) issued FAQs regarding suspicious activity reports and other anti-money laundering considerations which can be found here. These FAQs do not alter existing BSA/AML legal or regulatory requirements, nor establish new supervisory expectations – they do however clarify SAR regulatory requirements on such topics as maintaining accounts at the request of law enforcement, grand jury subpoenas, closing accounts, and narratives.


CFPB Final Rule – HPML Escrow Exemption

The Consumer Financial Protection Bureau (CFPB) has issued a Final Rule to implement Section 108 of the Economic Growth, Regulatory Relief, and Consumer Protection Act which can be found here. This rule will be effective once it is published in the Federal Register which had not happened yet at the time of writing this article. The CFPB also issued an executive summary and redline version of the rule found here.

As you are aware, Regulation Z requires escrow accounts for higher-priced mortgage loans (HPML) under 12 CFR 1026.35, however, the regulation also provides a number of exceptions to this requirement. This new exemption is narrower than the existing exemption, such as limiting it only to insured depositories and insured credit unions that meet the statutory criteria. Also, the origination limit is 1,000 loans secured by a first lien on a principal dwelling originated by an insured depository institution or insured credit union and its affiliates during the preceding calendar year, and EGRRCPA section 108, set an asset size threshold of $10 billion.

Briefly, under the final rule, the HPML escrow requirement does not apply to any loan made by an insured credit union and secured by a first lien on the principal dwelling of a consumer if:

  • The insured credit union had assets of $10,000,000,000 or less;
  • During the preceding calendar year, or, if the application for the transaction was received before April 1 of the current calendar year, during either of the two preceding calendar years, the creditor and its affiliates together extended no more than 1,000 covered transactions secured by a first lien on a principal dwelling;
  • During the preceding calendar year, or, if the application for the transaction was received before April 1 of the current calendar year, during either of the two preceding calendar years, the creditor extended a covered transaction secured by a first lien on a property that is located in an area that is either “rural” or “underserved”;
  • Cannot be subject to a forward commitment for sale (i.e., your organization will not hold the loan in portfolio) unless the loan is otherwise exempt (for example, it is a reverse mortgage) or the acquirer is also eligible for either the small creditor or meets the insured institution exemption; AND
  • Neither the credit union nor its affiliate maintains an escrow account for any extension of consumer credit secured by real property or a dwelling that the creditor or its affiliate currently services – two exceptions to this requirement. One is if the escrow was established after consummation as an accommodation to distressed consumers to assist such consumers in avoiding default or foreclosure. The other exemption to this criterion was made to avoid penalizing creditors that had not previously provided escrow accounts but established them specifically to comply with the regulation requiring escrows. This final rule extends the date providing that, “Escrow accounts established for first-lien higher-priced mortgage loans for which applications were received on or after April 1, 2010, and before [INSERT DATE 120 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER], are not counted for purposes of § 1026.35(b)(2)(iii)(D). For applications received on and after [INSERT DATE 120 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER], creditors, together with their affiliates, that establish new escrow accounts, other than those described in § 1026.35(b)(2)(iii)(D)(2), do not qualify for the exemptions provided under § 1026.35(b)(2)(iii) and (vi).”

Final Rule – Supervisory Guidance

The NCUA and CFPB both finalized rules regarding the role of supervisory guidance. The NCUA’s final rule can be found here and the CFPB’s final rule is found here. These rules will be effective 30 days after published in the Federal Register. The NCUA’s final rule will create new subpart D to 12 CFR 791 addressing the use of supervisory guidance. Similarly, the CFPB created new Subpart B to 12 CFR 1074. As noted in its press release, “By codifying the 2018 statement, the final rule confirms that the NCUA will continue to follow and respect the limits of administrative law in carrying out their supervisory responsibilities.”


NCUA Proposed Rules

Last week’s NCUA Board Meeting provided us with another round of proposed rulemakings.

CUSOs – the NCUA issued a proposed rule, which can be found here, to update the list of permissible CUSO lending activity, specifically to permit CUSOs to originate any type of loan that an FCU may originate. The proposal would also grant the NCUA additional flexibility to approve permissible CUSO activities and services outside of notice and comment rulemaking. Comments are due within 30 days after published in the Federal Register.

CAMELS – The NCUA’s existing CAMEL rating process addresses both sensitivity to market risk and liquidity risk within the “L” component. The proposed rule would add an “S” component to assess sensitivity to market risk and modify the “L” component to include only liquidity evaluation content and rating criteria. This proposed rule can be found here and is open for a 60 day comment period. As explained in the preamble to the proposed rule, “In general, the NCUA Board expects that adopting a sixth CAMELS rating component will not have any adverse effect on a credit union’s CAMEL composite rating. The proposed separation of sensitivity to market risk and liquidity risk into individual CAMELS rating components will reduce potential rating inconsistencies.”

Risk-Based Net WorthThe proposed rule would amend the NCUA’s regulations to provide that any risk-based net worth requirement will be applicable only to a federally insured natural-person credit union with quarter-end assets that exceed $500 million and a risk-based net worth requirement that exceeds six percent. This proposed rule can be found here and is open for a 30 day comment period.

RBC – Finally, the NCUA also issued an advanced notice of proposed rulemaking to simplify risk-based capital (RBC) requirements. Currently, RBC is set to become effective January 1, 2022. This ANPR can be found here and is open for a 60 day comment period. As summarized briefly by the NCUA, “The first approach would replace the risk-based capital 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). The second approach would retain 2 the 2015 risk-based capital rule but enable eligible complex FICUs to opt-in to a “complex credit union leverage ratio” (CCULR) framework to meet all regulatory capital requirements. The CCULR approach would be modeled on the “Community Bank Leverage Ratio” framework, which is available to certain banks.”

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