Federal Credit Unions Should File Form 990s

The Tax Cuts and Jobs Act of 2017 imposed a new 21 percent excise tax on applicable tax-exempt organizations that pay more than $1 million in remuneration to any covered employee for any taxable years beginning after December 31, 2017.

A covered employee is one of the five highest compensated employees for any taxable year beginning after December 31, 2016. Once a person becomes a covered employee, he or she will remain a covered employee for all subsequent tax years regardless of whether the individual continues to be one of the five highest compensated employees by the organization.

Almost all tax-exempt organizations file Form 990s. The Form 990 includes compensation information for senior management at tax-exempt entities.

However, compensation information is not available for federal credit unions; because federal credit unions are not required to file Form 990s.

The Internal Revenue Service (IRS) should require federal credit unions to file Form 990s.

The Form 990 is an important tool for the IRS to monitor and track potential noncompliance with the new excise tax.

It would also allow the public to determine if federal credit unions are providing excess compensation to senior management.

GOP Lawmakers Ask FinCEN for Extension in Filing CTRs

A group of House Republican lawmakers on March 23 asked Financial Crimes Enforcement Network (FinCEN) Director Ken Blanco for an extension for institutions filing currency transaction reports (CTRs) until at least after the coronavirus national emergency has concluded.‌

The lawmakers wrote that the regulatory compliance teams at small to mid-size institutions "are stretched thin with trying to stay on top of all of the demands associated with the pandemic."

The lawmakers noted that CTRs represent a major regulatory compliance burden for small community banks and credit unions and that such an extension “would help banks and credit unions focus on their most urgent and important priorities during this public health emergency, which are serving consumers and keeping credit flowing to the economy.”

Washington CU Regulator Expects CUs to Measure Consumer Complaints

The Washington Division of Credit Unions is expecting that credit union board of directors and senior management should receive periodic reports regarding consumer complaints.

The state regulator stated that these periodic reports should include the following:

• The volume and types of complaints received;
• The channels in which complaints are received (e.g. social media, email, in person);
• The reimbursements paid for potential violations of consumer protection laws; and
• Any identified trends.

In addition, credit unions should clearly define procedures for processing member complaints, including complaints pertaining to third party service providers.

NCUA's Harper: NCUA's Consumer Compliance Oversight Lacks Robustness

In an opinion piece appearing in CU Today, National Credit Union Administration (NCUA) Board Member Todd Harper wrote that customers of a bank acquired by a credit union will not have the same level of consumer financial protection oversight in their new credit union.

He pointed out in the column that the Federal Deposit Insurance Corporation (FDIC) has a more robust consumer compliance program than NCUA.

He noted that FDIC regularly conducts dedicated consumer compliance reviews that are separate and apart from safety and soundness exams, while NCUA with the exception of fair lending exams combines consumer compliance exams as part of the agency's safety and soundness exams performed NCUA's regional offices.

The agency has only budgeted for 30 fair lending examines in 2020. Also, the consumer compliance exams conducted by NCUA's regional offices will only cover some of the many consumer financial protection laws on the books.

He further stated that the agency has only 15 or so regional examiners, who are consumer compliance subject matter experts. In comparison, the FDIC has hundreds of examiners committed to performing these exams.

Despite his reservations about the agency's consumer compliance oversight gap, he still supports the agency's proposed rule on combination transactions.

Read the opinion piece.

CFPB Policy Statement Clarifies Abusive Practices

The Consumer Financial Protection Bureau (CFPB) on January 24 issued a policy statement outlining how it intends to cite and challenge “abusive” conduct in supervision or enforcement actions. The statement provides some long-awaited guidance on how the bureau views abusive conduct versus conduct which is unfair or deceptive. The policy statement is effective immediately.

When determining whether conduct meets the “abusive” standard in its supervision and enforcement activities, the CFPB said it will consider whether the harm to consumers outweighs the benefit to consumers. The bureau will also generally avoid “dual pleading” both abusiveness and unfairness or deception violations that stem from the same or nearly all of the same facts. Finally, the CFPB said it generally does not intend to seek monetary relief for abusive violations in instances where there is good-faith effort to comply with the abusiveness standard, except to address consumer injuries caused by the conduct.

“We’ve developed a policy that provides a solid framework to prevent consumer harm while promoting the clarity needed to foster consumer beneficial products as well as compliance in the marketplace, now and in the future,” said CFPB Director Kathy Kraninger. The CFPB did not rule out a future rulemaking to further define the abusiveness standard.

Read more.

NCUA Supervisory Priorities for 2020

The National Credit Union Administration (NCUA) released a letter on its supervisory priorities for 2020.

The primary areas of supervisory focus are:

• Bank Secrecy Act (BSA)/Anti-Money Laundering (AML);
• Consumer Financial Protection;
• Credit Risk Management;
• Preparation for Implementing Current Expected Credit Losses;
• Cybersecurity;
• LIBOR Cessation Planning; and
• Liquidity Risk

With regard to consumer financial protection, NCUA examiners will be required to review complaince with Electronic Fund Transfer Act (Regulation E), Fair Credit Reporting Act (FCRA), Gramm-Leach-Bliley (Privacy Act), Small dollar lending (including Payday Alternative Lending), Truth in Lending Act (Regulation Z), Military Lending Act (MLA), and Servicemembers Civil Relief Act (SCRA).

The focus on credit risk will place an emphasis on reviewing credit union’s loan underwriting standards and procedures, especially on the ability of borrowers to meet debt service requirements without undue reliance on the value of any collateral. Also, NCUA examiners will closely review credit unions with very high concentrations in specific type of loans.

NCUA further stated it will assess credit unions' exposure to LIBOR and planning related to the discontinuance of LIBOR.

Read more.

Tucoemas FCU Settles EEOC Discrimination Lawsuit

The U.S. Equal Employment Opportunity Commission (EEOC) announced on December 13 the resolution of a sex, age and retaliatory discrimination lawsuit against Tucoemas Federal Credit Union (Visalia, CA).

The credit union has agreed to pay $450,000, along with certain injunctive relief, to resolve the complaint.

According to the EEOC, Tucoemas FCU failed to hire three qualified internal female applicants over the age of 50 and instead hired a younger male applicant with no prior credit union experience. The charge further claims the company retaliated against two of the female employees after they filed complaints with the EEOC, constructively forcing one employee to quit and firing another.

In addition to monetary relief, Tucoemas FCU has agreed to: retain an external equal employment opportunity consultant to monitor compliance with Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967 (ADEA), and the decree; review and if necessary revise policies and procedures against all discrimination and retaliation prohibited by Title VII and the ADEA; provide training to all employees on sex and age discrimination and retaliation; and establish a centralized tracking system for recruitment, hiring, promotions, terminations, and sex and age discrimination complaints.

Read more.

Is Your Institution Ready for the End of LIBOR?

The London InterBank Offer Rate (LIBOR) is likely to cease being an active index by the end of 2021.

I have not seen any guidance issued by the National Credit Union Administration on this issue; however, the Office of the Comptroller of the Currency (OCC) in its most recent Semi-Annual Risk Perspective for Fall 2019 stated the cessation of LIBOR may increase operational risk and other risks at financial institutions.

The OCC recommended that financial institutions perform an accurate inventory of balance-sheet assets, liabilities, and off-balance sheet contracts that could be affected by a movement to an alternative index, including assets serviced by third party providers. This inventory would allow a financial institution to determine its potential exposure to the end of LIBOR.

Additionally, the OCC noted that the anticipated end of LIBOR poses compliance and reputation risks associated with transitioning customers to a new rate or offering new products or services that are tied to a new and untested index. The agency advised that financial institution's risk assessment "should include analysis of customer impact, repapering contracts, updating system applications, revising and testing models, and ensuring appropriate contractual fallback language and disclosures to clients."

The OCC noted that many products may be affected by the transition away from LIBOR including adjustable rate mortgages, private student loans, credit cards, reverse mortgages, and home equity lines of credit.

The OCC wrote that disclosures and communication with consumers about the end of LIBOR and the adoption of an alternative reference rate need to be easily understood. Also, financial institution should limit expected pricing issues with observable and objective rules.

In addition, management should determine whether third-party providers are on track to modify their systems.

Read more.

Survey: Compliance Worries Rise in 2019

U.S. banks and credit unions are reporting increased anxiety levels over compliance obligations, according to a survey released on December 4, 2019 by Wolters Kluwer.

This year’s regulatory and risk management indicator score was 95, up 10 points from 2018.

Specific points of high concern contributing to the overall indicator score were the effects of new Home Mortgage Disclosure Act rules, overall risk management concerns, and ongoing challenges from compliance change management.

The report cited that nearly eight in 10 respondents will continue to prioritize cybersecurity risk over the next year. Other areas being prioritize over the next 12 months were credit risk, compliance risk, third-party risk and operational risk, which all saw double-digit percentage increases.

Among top obstacles in implementing effective compliance programs, 47 percent of respondents stated manual compliance processes and 45 percent cited inadequate staffing.

The survey was conducted nationwide between August 7 and September 3, 2019 and generated 704 responses.

Read the press release.

NCUA Board Member Harper Calls for Dedicated Consumer Compliance Exam for Large, Complex CUs

National Credit Union Administration (NCUA) Board Member Todd M. Harper on October 30 is requesting public comment on his proposal to create a dedicated consumer compliance exam program for large, complex credit unions.

The NCUA’s current compliance examinations covering consumer financial protection laws in credit unions with total assets of $10 billion or less differs from other financial institutions regulators. Other regulators complete regularly scheduled, risk-focused consumer compliance reviews and assign a separate consumer compliance rating outside of the CAMEL process for institutions under their jurisdiction.

Harper noted the NCUA’s approach to consumer financial protection reviews also runs counter to the congressionally mandated mission of the Federal Financial Institutions Examination Council, which works to develop uniform standards and processes across all financial institution regulators.

Harper would like to add three new full-time employees in the NCUA’s Office of Consumer Financial Protection in 2020, who would develop and later launch a dedicated consumer compliance examination program for large, complex credit unions.

Read the press.

Few Options to Offset Costs for CUs Topping $10 Billion Asset Threshold

S&P Global Market Intelligence recently wrote that large credit unions have few options available for offsetting the regulatory burden of breaching the $10 billion asset threshold.

This article should be of interest for credit unions that are within several years of the $10 billion asset threshold. As of June 2019, there were three credit unions with at least $9 billion in assets and another 5 credit unions with between $8 billion and $9 billion in assets.

The article notes that credit unions, which topped the $10 billion threshold, have seen a drop in fee revenue due to the Durbin Amendment and an increase in compliance cost, as the credit unions become subject to oversight by the Consumer Financial Protection Bureau and increased regulation by the National Credit Union Administration.

Credit unions that have topped the $10 billion asset threshold have seen an up to 50 percent decline in debit card interchange revenues due to the Durbin Amendment.

The article also states that credit unions that top the $10 billion asset threshold may lack the ability to scale up rapidly to offset these new costs, as they tend to grow organically.

Read the article.

Is NCUA AWOL in Examining CUs for SCRA Compliance?

Is the National Credit Union Administration (NCUA) absent without leave (AWOL) with regard to ensuring credit unions are complying with the Servicemembers Civil Relief Act (SCRA)?

On November 2, Hudson Valley Federal Credit Union (Poughkeepsie, NY) settled allegations that it violated the SCRA by repossessing vehicles owned by SCRA-protected service members without first obtaining the required court orders.

But what I found of interest in the press release was that prior to August 2014 Hudson Valley FCU did not have any written policies and procedures that address SCRA's protections against non-judicial auto repossessions.

You would have expected that one of the largest credit unions in the country would have had in place policies and procedures prior to August 2014 to ensure that the credit union was complying with the law.

Also, it is notable that NCUA was not part of this settlement. According to the press release, the Department of Justice launched its investigation after learning about two private SCRA lawsuits filed against the credit union.

This begs the question as to why there was not a referral from NCUA to the Department of Justice regarding these SCRA violations.

The evidence suggests that NCUA has not historically examine federal credit unions for compliance with SCRA. A July 2012 Government Accountability Office (GAO) report found that between 2007 and 2011 NCUA only examined 0.02 percent of federal credit unions for SCRA compliance.

But a NCUA official told GAO that the agency would start to review credit union lending practices to ensure compliance with SCRA.

It is possible NCUA examined Hudson Valley FCU and recommended remedial actions to address the credit union's SCRA issues.

To determine if NCUA has followed through on its pledge to GAO, the NCUA Inspector General should launch an audit reviewing NCUA's examination of credit unions for SCRA compliance.

Hudson Valley FCU to Pay $95,000 for Illegally Repossessing Servicemembers' Vehicles

Hudson Valley Federal Credit Union (Poughkeepsie, NY) has agreed to pay $95,000 to resolve allegations that it violated the Servicemembers Civil Relief Act (SCRA) by repossessing vehicles owned by seven SCRA-protected service members without first obtaining the required court orders.

An investigation found that prior to August 2014, Hudson Valley FCU did not have any written policies or procedures that addressed the SCRA’s protections against non-judicial auto repossessions.

Under the agreement, Hudson Valley FCU has agreed to provide $10,000 in compensation to each of the six affected service members, plus any lost equity in the vehicle with interest. An additional service member, whose vehicle was repossessed but returned within 24 hours, will receive $5,000. Hudson Valley has also taken steps to repair the credit of the affected service members.

The credit union will pay a civil penalty of $30,000 to the United States.

Also, the credit union has committed to protecting service members’ rights in the future.

Read the press release.

Employees Raise Concerns About PenFed's AML Program

The Wall Street Journal is reporting that employees at Pentagon Federal Credit Union (McLean, VA) reported to executives and regulators concerns about the credit union's anti-money laundering (AML) program.

"The concerns raised about Pentagon Federal Credit Union in 2016 and 2017 included understaffing, gaps in reporting of potentially suspicious transactions to the government, insufficient monitoring of wire transfers, a lack of anti-money-laundering training for senior leaders and inadequate scrutiny of potentially high-risk customers."

However, information obtained by the Wall Street Journal does not provide any evidence of money laundering by the credit union's members.

Pentagon Federal Credit Union (PenFed) told the Wall Street Journal that the allegations were false; but the credit union has made changes to its AML program, including reorganizing management, hiring more staff, adopting new policies and investing in suspicious-activity detection technology.

The article also states that PenFed entered into a document of resolution with the National Credit Union Administration to bolster its AML program.

Read the story (subscription required).

Federal Regulators Issue Statement on Sharing Resources for BSA/AML Compliance

The financial regulatory agencies and the Financial Crimes Enforcement Network on October 3 issued a joint statement outlining how banks and credit unions may enter into collaborative arrangements to share resources in order to more effectively manage their Bank Secrecy Act and anti-money laundering obligations.

Collaborative arrangements described in this statement are most suitable to financial institutions with a community focus, less complex operations, and lower-risk profiles for money laundering or terrorist financing.

The agencies described several situations in which collaboration might be beneficial for financial institutions, such as conducting internal control functions, independent testing and BSA/AML training.

When entering into collaborative arrangements, banks and credit unions should carefully consider the arrangement in relation to their risk profile, ensure adequate documentation, consider legal restrictions, establish appropriate oversight mechanisms, and ensure that the arrangement is consistent with sound principles of corporate governance, the statement said.

The agencies added that “ultimately, each bank is responsible for ensuring compliance with BSA requirements” and that “sharing resources in no way relieves a bank of this responsibility.”

The National Credit Union Administration noted "[t]his may benefit some credit unions, especially smaller institutions which may find hiring or retaining staff with the necessary knowledge a challenge."

Read the statement.

NCUA Response to Senator About Consumer Protection Issues at CUs

In response to a written question from Senator Sherrod Brown (D - OH), National Credit Union Administration (NCUA) Chairman McWatters stated that the agency had identified and corrected numerous consumer financial protection issues at credit unions between August 2014 and June 2017.

Senator Brown asked: "During your time on the board, have NCUA supervision teams identified and corrected any consumer protection issues?

McWatters wrote that NCUA examiners had corrected many consumer financial protection issues at credit unions. McWatters further noted that "[t]he majority of Federal consumer financial protection law violations ... involved the Truth in Lending Act, the Equal Credit Opportunity Act, and the Real Estate Settlement Procedures Act."

To address consumer financial protection violations, NCUA required credit unions to revise and implement new policies and procedures, increase staff training, or impose other administrative remedies.

The question and answer were part of the June 22 hearing by the Senate Committee Banking, Housing, and Urban Affairs titled "Fostering Economic Growth: Economic Perspective."

Go to the hearing record.

Trade Groups Petition FCC for Clarification of Autodialer

A coalition of industry trade groups, including bank and credit union trade associations, asked the Federal Communications Commission (FCC) for new rules that would ensure that customers can receive important communications from their financial institutions and other businesses.

In a joint petition to the FCC, the groups asked the FCC to issue a new interpretation of a key term in the Telephone Consumer Protection Act (TCPA) -- the definition of an “automatic telephone dialing system,” commonly known as an “autodialer.” The TCPA imposes restrictions on calls made by financial institutions and other businesses when using an autodialer.

The petition comes after a federal appellate court in March struck down the portion of a 2015 FCC order that had defined “autodialer” expansively to include, for example, ordinary smartphones -- and potentially covering nearly every type of dialing equipment that a business would use to call its customers.

“The TCPA landscape is dysfunctional and in need of clarity from the FCC,” the groups wrote to the FCC. “The statute, originally intended to target a specific abusive telemarketing practice, has been expanded by courts and the FCC, turning it into a breeding ground for frivolous lawsuits against legitimate businesses trying to communicate with their customers.”

If the FCC reinterprets the term autodialer in line with the TCPA’s text and congressional intent, it would significantly reduce the number of calls made by banks and credit unions that are subject to the TCPA’s restrictions, lowering compliance and litigation costs.

Read the letter.

NCUA Identifies Supervisory Priorities for 2018

The National Credit Union Administration (NCUA) in a letter to credit unions announced its supervisory priorities in 2018.

The agency identified the following seven areas for supervisory focus in 2018: cybersecurity assessment, Bank Secrecy Act compliance, internal controls and fraud prevention, interest rate and liquidity risk, automobile lending, commercial lending, and consumer compliance.

With respect to automobile lending, NCUA will focus on portfolios with the following concentrations -- extended loan maturities of over 7 years, high loan-to-value ratios, near-prime and subprime, and indirect lending programs.

With regard to consumer compliance, NCUA examiners will focus on three areas -- federal credit unions’ good faith efforts to comply with the Consumer Financial Protection Bureau’s amendments to the regulations implementing the Home Mortgaage Disclsoure Act (HMDA), credit unions' effort to comply with the Military Lending Act, and credit unions' overdraft policies and procedures for compliance with Regulation E.

Read the letter.

Nine Virginia CUs Sued over ADA Website Violations

The Credit Union Times is reporting that nine Virginia credit unions are being sued for violating the Americans with Disability Act (ADA) by failing to make their websites accessible to the visually impaired.

The lawsuits allege the credit unions' websites were not embedded with the code that would allow screen readers to describe graphics, or contained links with no readable text, or had redundant links.

The lawsuits also claim the credit unions were informed about the problems and failed to fix the problems on their websites.

The nine credit unions are Cadmus Credit Union Inc. (Richmond, VA), Virginia Credit Union Inc. (Richmond, VA), ABNB FCU (Chesapeake, VA), Blue Eagle CU (Roanoke, VA), Member One FCU (Roanoke, VA), NRL FCU (Alexandria, VA), Arlington Community FCU (Falls Church, VA), Henrico FCU (Henrico, VA), and Pentagon FCU (Tyson, VA).

According to the story, NRF FCU has reported that the issue has been resolved.

These lawsuits have some credit union bloggers warning that credit unions need to start making their websites ADA compliant.

Read the Credit Union Times story.

CFPB Temporarily Raises HELOC Reporting Threshold, Makes HMDA Technical Corrections

The Consumer Financial Protection Bureau (CFPB) on Thursday issued a final rule making several technical corrections and clarifications to the expanded data collection under Regulation C, which implements the Home Mortgage Disclosure Act, as well as temporarily raising the threshold at which banks and credit unions are required to report data on home equity lines of credit (HELOC).

Under the rule as originally written, banks and credit unions originating more than 100 HELOCs would have been generally required to report under HMDA, but the final rule temporarily raises that threshold to 500 HELOCS for calendar years 2018 and 2019, allowing the bureau time to assess whether to make the adjusted threshold permanent.

The final rule contains a number of clarifications, technical corrections, and minor changes to the HMDA regulation. In finalizing the technical corrections, the CFPB backtracked on a proposal to define multifamily dwellings as including properties in multiple locations. The CFPB also clarified certain key terms, such as “temporary financing” and “automated underwriting system.”

Read the press release.