Current Regulatory and Legal Climate for Credit Unions

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1 Current Regulatory and Legal Climate for Credit Unions Moss Adams Supervisory Committee Training Workshop June 2, 2014 Harold B. Scoggins, III Farleigh Wada Witt

2 2 Conflicting Regulatory Imperatives 1. NCUA: You must generate income to grow/preserve capital.

3 3 Conflicting Regulatory Imperatives 2. NCUA, CFBP, Congress, Others: If an activity generates income, it is either too risky or bad for consumers. Therefore, you must limit or cease involvement in that activity, or deal with increasing regulation of it.

4 4 Conflicting Regulatory Imperatives 3. NCUA, CFPB, Congress, Others: Credit Unions should serve the underserved, help consumers to avoid hurting themselves

5 NCUA Supervisory Focus LCU 2014-CU-02 (Stated NCUA Focus) Interest Rate Risk Low rate environment creates more risk for long term investments and loans Low loan-to-share ratio drives some to longer term Evaluate with concentration risk Loan Participations Use of participations to get into new business CU s hurt by poorly serviced participations Compliance with new regulation

6 NCUA Supervisory Focus LCU 2014-CU-02 (Stated NCUA Focus) Private Student Lending sleeping defaults Credit risk not truly evaluated borrower is a student Ability to Repay/Qualified Mortgage rule compliance Evaluate compliance Evaluate CU s credit risk, liquidity risk, and concentration risk for mortgages

7 NCUA Supervisory Focus LCU 2014-CU-02 (Stated NCUA Focus) Cybersecurity threats Service to Money Service Businesses Side note service to marijuana businesses New CUSO regulation

8 NCUA Supervisory Focus Additional (unstated) focus areas Concentration risk Investments Real estate loans Participations Member Business Loans Membership Audits Fair Lending

9 9 Risk Based Capital Regulation change proposed January 23, 2014 Comments due May 28, 2014 History: Credit Union Membership Access Act (1998) Established statutory capital requirements Well capitalized = 7%, etc. Established statutory definition for net worth Required NCUA to prescribe alternative calculation for CU s it determined were complex

10 10 Risk Based Capital Current requirements: standard 7% base Higher net worth required if CU is complex Over $50M Risk based net worth calculation shows higher net worth required Current regulation requires higher capital levels for specific asset categories different CUs have different requirements depending on type of assets Example: RE loans over 25%, MBLs over 15% of assets = 14% capital requirement

11 11 Risk Based Capital Proposed Regulation: Capital requirements the same for all CUs: 7% standard 10.5% risk-based (for CU s over $50M) Risk based net worth calculated by making risk weighted adjustments to capital, assets

12 12 Risk Based Capital Key adjustments to net worth for RBC calculation: ALLL counts as capital, but only to limit of 1.25% of risk assets NCUSIF deposit deducted from capital

13 13 Risk Based Capital Key adjustments to assets for RBC calculation: Cash, NCUSIF deposit, US government bonds = 0% Mortgages less than 25% assets = 50% Mortgages 25% to 35% assets = 75% Most current loans except MBL = 75% Other real estate loans (i.e. equity loans) over 10 % assets = 125% Other real estate loans (i.e. equity loans) over 20% assets = 150% MBL over 15% assets = 150% Investments between 5 10 years = 150%

14 14 Risk Based Capital XYZ Credit Union Risk Based Captial per proposed NCUA calculation: 17.66% due to types of assets held Risk based capital would decrease if : Delinquent loans increased Equity loans increased Business loans increased Long term investments increased

15 15 Recent Regulatory Changes 1/10/14 Mortgage regulations ATR/QM Loan Originator Comp Credit Insurance Premium Financing Servicing RESPA Servicing TILA Appraisals Escrows NCUA Loan Participation NCUA CUSO

16 16 ATR/QM Effective Date - January 10, 2014 (apps received after that date) Coverage loans secured by a dwelling, excludes HELOCs. First lien and equity transactions Exceptions: temporary & construction loans, reverse mortgages Rule: Creditor Must Determine Ability to Repay

17 17 ATR/QM Qualified Mortgage (non HPML) = conclusive presumption of compliance Qualified Mortgage (HPML) = rebuttable presumption of compliance Other Loans = no presumption, must satisfy ATR requirements

18 18 ATR/QM Qualified Mortgage Consider & verify income or assets, debt, alimony, child support DTI 43% or less (max payment possible in 1 st 5 years) No interest only, negative am, balloon payments (temp exception) Limited prepayment penalties 2% in first 2 years; 1% in 3 rd year, none after; only fixed or stepped rate loans Points and fees 3% or less (higher for loans under $100k)

19 19 ATR/QM If not QM, CU must use reasonably reliable 3 rd party records to verify 8 underwriting factors DTI/residual income Credit history Mortgage obligations Income or assets (source of repayment) Employment Payment for simultaneous loans Debt, alimony, child support obligations

20 20 NCUA Loan Participation Reg. Applies to state chartered and FCU Substantive requirements Originator retained interest 5% (SCCU); 10% (FCU) Participation agreement with specified issues covered Policy requirements Underwriting Concentration limits originator, loan type, borrower Approval

21 21 NCUA CUSO Regulation Now covers state and federal CU CUSOs National CUSO Registration Basic info for standard CUSOs Additional information for Complex/High Risk CUSOs Credit/lending activities Information technology Custody, safekeeping, investment management Annual reporting NCUA access to books and records

22 22 Membership Issues Membership audits Is CU complying with membership requirements in its own charter/bylaws? Associational FOM for occupational, associational, or multiple bonds Is association bona fide? Does it exist apart from the CU? Proposed NCUA regulation with criteria for organization, purpose, status of associations

23 23 Other Emerging Compliance Issues Integrated Mortgage Disclosures Effective August 1, 2015 Completely revamp origination process, forms, data processing Training Fair Lending CFPB focus on indirect loans will likely spread to NCUA Disparate impact: evidence of different results = evidence of discrimination

24 24 Other Emerging Compliance Issues Overdraft protection further restrictions likely Enterprise Risk Management Examiners expecting semi-formal policy/procedures even for smaller CUs Vendor management (NCUA)

25 25 SC Focus? Understand impact of tidal wave on management; regulatory triage is a necessary tool allocate time and resources to the areas of largest risk/concern. Document SC attention to regulatory compliance issues (internal auditor reports, meeting minutes, etc.)

26 26 Thank You! Harold B. Scoggins, III 2013 Farleigh Wada Witt

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