HOT TOPICS FOR CUS & CUSOS. Brian Lauer Amanda Smith Michael Heller Jennifer Winston Mark Vakil

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1 HOT TOPICS FOR CUS & CUSOS Brian Lauer Amanda Smith Michael Heller Jennifer Winston Mark Vakil

2 Items for Discussion Run Down of Regulatory and Policy Trends CUSO Registry Discussion CFPB and Consumer Regulatory Trends New MBL Rule and Indirect Lending Opinion Letter Summary of Conference Highlights

3 Regulatory Trends Field of Membership (Proposal) Associational Common Bonds Fixed Assets (Final) Regulatory Appeals Risk Based Capital (Final) Cybersecurity CECL (Proposed) GAO Report Network Credit Union Small Entity Reg Relief Legal Opinions

4 Mark Vakil CUSO REGISTRY

5 What is the CUSO Registry? The CUSO Registry: is a web-based system that CUSOs will use to provide information directly to NCUA: Basic Information: Required for all CUSOs Additional Information: (for CUSO s determined to be engaging in high risk/complex services: Credit and Lending:Origination of business, mortgage, student and credit card loans, Loan support services including servicing Information Technology: Electronic transactions, record retention, security, disaster recovery, and payroll processing Custody, Safekeeping and Investment: Does include trust services

6 Basic Information Pursuant to 12 CFR 712.3(d)(4): within 60 days of CUSO formation, the new CUSO must file a report containing basic information: Name Tax ID Number Address, Telephone, and Website Primary Contact Services Provided Names and Charter Numbers of CU investors, lenders, and clients Parent and subsidiary CUSOs Annually submit a report directly to the NCUA

7 High Risk/Complex Services Will require enhanced reporting/providing additional information: List of services provided to each CU client Investment and loan amounts from each CU Most recent annual audited financials will have to have CPA audit statement, except wholly owned CUSO Lending CUSOs for each type of loans, Will have to report total dollar and total number of loans outstanding Total dollar and total number of loans granted year to date

8 FOIA Protection Trade Secret if information is deemed trade secret, it is exempt from FOIA request Any information disclosed in connection with examination of a credit union Users of the CUSO Registry will see different information depending on which of the following groups they belong to: CUSOs and designated CUSO Users: CUSO s own records and users Credit Union Regulators: (NCUA and state authority): All CUSO Registry Records General Public: Legal Name, any trade names, CUSO Registry number, services offered, Address, public website address, public phone number (not yet available; expected this summer)

9 Frequently Asked Questions Acknowledgment and Certification Advocated for a revised acknowledgement; NCUA changed it; changed in early March Services Category; Holding Company: Work with Legal Counsel to best determine service category Must represent what service provide to each credit union client Holding Company Client is owner Credit Union Parent and Subsidiary CUSOs Dormant/Inactive CUSOs Registry Instructions: Select No Services Being Offered No CEO

10 Jennifer Winston REGULATORY DEVELOPMENTS AND CFPB UPDATE

11 FAIR LABOR STANDARDS ACT (FLSA) Proposed changes to White Collar Exemptions from overtime requirements expected to go into effect this year. Increase the salary levels used as thresholds for determining the overtime exemption, and Establish a process for automatic, annual updates to the salary thresholds.

12 WHITE COLLAR EXEMPTION TEST Currently, any employee making less $23,660/year must be paid overtime if they exceed 40 hours a week. Once finalized, any employee making less than $50,440/year ($970/week) will now be eligible for overtime. Threshold for Highly Compensated Employees (HCE) would raise from $100,000 total annual compensation to $122,718.

13 THRESHOLD SALARY LEVELS If any employee is making more than $50,400, you must then review their job duties to determine if they fall under the Executive, Administrative, or Professional exemption. This job duties analysis is not changing from the current rule. Follow up with counsel if you believe you will have employees that many now be overtime eligible.

14 MARKETING SERVICES AGREEMENTS CFPB not illegal per se, but have grave concerns MSAs are used to hide illegal kickbacks Intends to continue to scrutinize MSAs Any MSAs you currently have should be reviewed by counsel

15 Ways to mitigate risks: Written agreement states no direct solicitation to individual consumers Prove fair market value of all services; use Independent third party to validate fees Verify, at least annually, that services are actually being provided Disclose relationship to the consumer No preferred status no Trusted Partner designation No exclusive arrangements

16 ANNUAL PRIVACY NOTICE Change allows the annual privacy notice to be posted continuously on your website in a clear and conspicuous manner, in lieu of mailing, if: For most Financial Institutions, if your privacy notice reads We don t share for: Our affiliates everyday business purposes Our affiliates to market to you Nonaffiliates to market to you Use Regulation P model form Annual notice has not changed since last notice was issued.

17 CFPB PROJECT CATALYST INITIATIVE Designed to encourage consumer-friendly developments in markets for consumer financial products and services Companies can now apply to the CFPB for a No- Action Letter (NAL) NALs are intended for innovative financial products or services that promise substantial consumer benefit where there is substantial uncertainty about whether or how specific provisions of certain statutes implemented or regulations issued would be applied.

18 NO-ACTION LETTERS CFPB has reviewed the application and has no present intention to recommend enforcement or supervisory action NALs will not be routinely available and CFPB anticipates they will be provided rarely and on the basis of exceptional circumstances and a thorough and persuasive demonstration of the appropriateness of such treatment

19 Do not give an exemption or waiver of any law or regulation Are non-binding on the CFPB or courts. Provide no immunity against private litigation or enforcement actions by other federal and state government agencies Do not excuse potential UDAAP or any other violations Can be revoked at any time

20 REGULATION BY ENFORCEMENT March 2016 Director Cordray acknowledged CFPB s regulation by enforcement approach and stated the reach of CFPB consent orders is not limited to the parties involved. Orders are intended to have precedential effect Vast majority of enforcement actions involve some sort of deception or fraud

21 DEBT COLLECTION UDAAP Failing to identify and timely remit to Debt Buyers payments relating to accounts the FI sold. Provided debt buyers with inaccurate APR data, resulting in inaccurate credit reporting and collection efforts. Debt collection firms altered affidavits, sworn statements, certification of proof, and other such declarations after their execution. Refund $11 million and stop collection on an additional $34 million in debts.

22 RECENT CFPB GUIDANCE Fair Credit Reporting Act Furnishers under the FCRA must have reasonable written policies and procedures regarding consumer information FDCPA Risk of committing unfair acts or practices when engaging in-person debt collection visits Mortgage servicing violations failure to honor loan modifications on transferred accounts Mortgage steering and improper MLO compensation

23 CFPB POLICY PRIORITIES FOR 2016 Look for a proposed larger participant rule for the installment lending/open-use credit market. Proposed rules on furnisher and consumer reporting accuracy and dispute resolution. Rulemaking that establishes clear guidelines for all debt collectors throughout the debt collection process.

24 Michael Heller NEW MBL RULE

25 Approved unanimously by NCUA Board on February 19, 2016 Majority of rule becomes effective January 1, 2017 Personal Guarantee Requirement will be eliminated 60 days after the final rule s publication in the Federal Register

26 GENERAL OVERVIEW Final rule replaces the prescriptive requirements and limitations of the current rule with a broad principles-based regulatory approach Final rule differentiates which loans are subject to MBL cap, and which loans are subject to safety and soundness guidelines

27 PRINCIPLES-BASED REGULATORY APPROACH Purpose is to give credit unions more flexibility to implement principle-based risk management processes and policies and staff to maintain a comprehensive understanding of the borrower s financial capacity Credit unions must establish risk tolerances at the relationship and overall portfolio levels to ensure that the risks taken are consistent with prudent standards within the managerial and financial capability of the credit union

28 PRINCIPLES-BASED REGULATORY APPROACH Final rule removes most prescriptive lending limits and corresponding waiver requirements, including: Aggregate C&D Loan Limit Minimum Borrower s Equity for C&D Loans LTV Requirement Personal Guarantee Requirement (effective 60 days after publication in the Federal Register) Max Unsecured MBL to 1 Member Group or Group of Associated Members Max Aggregate Unsecured MBL Loan Limit Max Aggregate Net MBL to 1 Member Group or Group of Associated Members Waiver process replaced with principle that loans must be appropriately collateralized against associated risk

29 COMMERCIAL LOAN V. MBL Final rule distinguishes policy and program responsibilities for commercial loans from the statutory limit on MBLs MBL (counts towards MBL cap): MBL fully secured by 1 to 4 family residential property that is not a member s primary residence (if outstanding aggregate net MBL balance is greater than $50,000) MBL secured by a vehicle manufactured for household use (if outstanding aggregate net MBL balance is greater than $50,000)

30 COMMERCIAL LOAN V. MBL Final rule distinguishes policy and program responsibilities for commercial loans from the statutory limit on MBLs Commercial Loan (does not count towards MBL cap, but subject to safety and soundness guidelines): Federal or state agency (or its political subdivision) fully insures repayment, fully guarantees repayment, or provides an advance commitment to purchase commercial loan in full (if aggregate outstanding balance plus unfunded commitments, less any portion secured by shares in the credit union is greater than $50,000) Non-member commercial loan or participation interest in a commercial loan made by another lender (if aggregate outstanding balance plus unfunded commitments, less any portion secured by shares in the credit union is greater than $50,000)

31 COMMERCIAL LOAN VS. MBL Final rule distinguishes policy and program responsibilities for commercial loans from the statutory limit on MBLs Neither MBL or Commercial Loan (does not count towards MBL cap, but subject to safety and soundness guidelines): Loan fully secured by 1 to 4 family residential property that is a member s primary residence (if outstanding aggregate net MBL balance is greater than $50,000) Business loan with aggregate net member business loan balance less than $50,000 Commercial loan fully secured by shares in the credit union making the extension of credit or deposits in other financial institutions

32 OTHER HIGHLIGHTS Final rule exempts some credit unions with assets under $250 million from commercial loan policy and the board and management requirements Final rule permits FISCU exemption if its state MBL rule is at least as stringent Part 723 and complies with FCUA requirements, as approved by NCUA

33 Michael Heller INDIRECT LOAN PARTICIPATIONS

34 GENERAL OVERVIEW August 10, 2015 NCUA Opinion Letter FICU may purchase a loan participation in a loan generated by an indirect lending arrangement FICU, as seller of a participation, may be considered the originating lender where the loan was generated by an indirect lending arrangement with a retailer

35 LIMITATIONS Permits broader interpretation of the definition of originating lender only: When the retailer is acting as an agent of the FICU and is simply performing an administrative function (i.e. processing a loan for the FICU); AND When the retailer s activities are an extension of the FICU s lending operations (i.e. retailer is the facilitator that is part of the FICU s loan processing operation and the FICU is the de facto originating lender); AND FICU makes the final underwriting decision on the indirect loan; AND When the retailer assigns the loan/sales contract to the FICU very soon after it is signed by the borrower and the retailer

The Impact of the New CUSO Rule and Proposed Risk Rating of CUSO Investments. Guy A. Messick Messick & Lauer PC General Counsel to NACUSO

The Impact of the New CUSO Rule and Proposed Risk Rating of CUSO Investments Guy A. Messick Messick & Lauer PC General Counsel to NACUSO Credit unions are fenced in by regulations. WHY CUSOS MATTER 23,866