How the coronavirus created new compliance headaches
The COVID-19 pandemic has brought about the largest global disruption of our lifetime, and how credit unions respond during this upheaval will define the industry for generations to come.
While the pace of regulatory changes has tapered from its peak, ensuring compliance with these changes still poses a challenge. While credit unions are well into the implementation of their respective pandemic response plans, there are still a few items and best practices to bear in mind in terms of regulatory compliance during this time.
Collectively, regulatory agencies have reiterated that they will be taking a “flexible supervisory and enforcement approach” when reviewing the actions taken to assist consumers during this pandemic. This approach seeks to ensure credit unions have provided members with assistance in a prudent manner that is “consistent with safe and sound practices” and that “provides fair treatment of consumers, and complies with applicable statutes and regulations, including consumer protection laws.”
The best way to evidence compliance with safe and sound practices is to document every interaction, conversation and decision made. Supervisory flexibilities aside, the specter of Unfair, Deceptive & Abusive Acts or Practices (UDAAP) remains. Therefore, you must ensure all workout strategies, payment accommodations, fee handling, payday alternative loans (PALS I and PALS II) and small-dollar loan programs are fully documented and all related policies and procedures are adhered to consistently.
Where credit decisions are made that fall outside the stated guidelines, ensure that your processes include second level reviews and approvals, and again, document the reason for any variances.
When providing assistance to members during this time, communication is critical, and incorporating audit oversight specific to this pandemic regarding member communication is key to ensuring compliance. Audits should include a special focus on call monitoring, a review of solicitations for workout programs, ensuring accurate written disclosures are issued to members relative to any changes in terms, ensuring member authorizations are fully documented, and so on.
One of the largest requests consumers are making for financial assistance during this time is in regards to mortgages, specifically mortgage forbearance. Thus, it is important to note that the CARES Act requires borrowers to make a request to the servicer for a forbearance and affirm that they are experiencing a financial hardship during the COVID-19 emergency.
This request constitutes an “incomplete application” and triggers the Real Estate Settlement Procedures Act (RESPA) requirement to provide an acknowledgement notice within five days of receipt of that incomplete application, even if the borrower has been offered or is in a short-term option. While the agencies have provided a grace period, it is prudent to meet this timeline when possible.
Thus, you should ensure all mortgage-related audits continue to include review of borrower required notifications during this pandemic. When observing foreclosure moratoriums and eviction prohibitions, it is critical to also be aware of the individual mandates issued by the agencies/GSEs and states.
The GSEs and other regulatory entities have also issued guidance on appraisals and interior inspection alternatives, and you should update your guidelines and processes accordingly to ensure these activities are executed and documented appropriately. Appraisals will continue to meet NCUA requirements if they comply with Uniform Standards of Professional Appraisal Practice (USPAP), which does not require an interior, onsite assessment if not deemed necessary by the appraiser. Particular focus should be given to residential and commercial real estate transactions that utilize the 120-day deferment offered in the April Interim Final Rules.
The CARES Act also amends the Fair Credit Reporting Act (FCRA) to provide relief from negative credit reporting for those who seek payment modifications or forbearances because of the coronavirus pandemic. Section 4021 requires institutions to report the account as current where an accommodation has been made, and the consumer fulfills the terms of the accommodation. It is critical that accurate reporting is ensured for all accounts and products that are affected by this pandemic. Reporting requirements continue for 120 days after the end of the national coronavirus declaration, so on-going audits of this activity are crucial.
For those that service Small Business Administration (SBA) Loans, there will undoubtedly be a high degree of regulatory scrutiny on payment accommodations that modify, extend, suspend or defer the repayment terms on SBA-guaranteed loans to borrowers affected by COVID-19. Thus, you need to ensure that your SBA program guidelines are clear and that you have identified the types of modifications that require SBA’s approval from those that do not. Again, document these files thoroughly.
It bears noting that credit unions are not relieved of their regulatory reporting requirements during the pandemic, though the NCUA has offered credit unions flexibility in some instances. As referenced in the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with customers affected by the Coronavirus, you are not required to report certain loan modifications as troubled debt restructurings (TDRs). However, these modifications should be reported properly using applicable regulatory reporting instructions and generally accepted accounting principles on the quarterly call report.
Credit unions also remain subject to Bank Secrecy Act (BSA) reporting requirements and timelines. However, if you are experiencing difficulties due to reduced staff or circumstances resulting from COVID-19, you must have your BSA officer alert FinCEN and NCUA as soon as possible. The same applies to quarterly call reports. You must file the call reports as soon as reasonably possible and must notify NCUA of the difficulty in meeting the reporting deadline.
In general, regulatory bodies across the board have telegraphed their intent to be flexible when evaluating activities undertaken during the pandemic. Thus, managing these changes as part of an overall Compliance Management System is vital to demonstrating good faith efforts to balance member assistance with regulatory compliance and, thereby, earning regulators’ goodwill.