Compliance words under magnifying glass to illustrate the importance of following rules, regulations and guidelines in your profession, at work or career to conform to legal requirements
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A closer look at compliance issues
Last month marked the seventh anniversary of the passage of the Dodd-Frank Act and the sixth anniversary of the establishment of the Consumer Financial Protection Bureau — and the pace of regulatory change since then has been nothing short of overwhelming.
Credit Union Journal asked a host of regulatory experts to discuss what they consider to be the top compliance challenges for credit unions right now, as well as new regulations coming soon — and, most importantly, how to cope with them.
Glory LeDu, CEO of League InfoSight
Updates to the Military Lending Act have caused “undue regulatory burdens” upon credit unions, especially smaller-asset institutions. “The cost to stay compliant is very expensive,” said LeDu. “For example, when there is a change in rule that requires new disclosures (such as that of the MLA), credit unions are forced to change their existing documentation. This is an additional cost on top of what they are already paying for documents – this can be a significant expense for small, community financial institutions."
LeDu also said that a small credit union told her they are now paying $11,000 per year just on their account and lending documents.
Michael Christians, senior federal compliance counsel at the Credit Union National Association
The Military Lending Act is one of the top compliance issues right now, according to Michael Christians. Credit unions have struggled with implementation of MLA since its original effective date of Oct. 3, 2016, noted Christians, “due to ambiguities in the rule itself and a lack of clarification from the Department of Defense in its interpretive rule and guidance.”
Those challenges will become even more real for credit unions come October, when credit card accounts move within the scope of the rule, he added.
To deal with this, Christians said CUs need to familiarize themselves with the requirements of the rule. “Credit unions need to make sure their systems are properly calibrated to accurately calculate the military annual percentage rate.”
Linda Bow, director of compliance at the New York Credit Union Association
Linda Bow, director of compliance at the New York Credit Union Association, cited coming changes to the Home Mortgage Disclosure Act. CUNA’s Christians agreed, saying for impacted CUs, the HMDA requirements will “balloon” beginning on Jan. 1, 2018.
Among the many changes that will happen on that date: an increase in the types of transactions subject to the rule; a significant expansion in the data points required to be collected and changes to reporting requirements.
“They’ve got to be hard at work now as some procedural changes will be necessary as early as the fourth quarter of 2017,” he said. “In addition, institutions need to be working closely with third-party vendors to ensure their systems will be able to accurately capture many new data fields on all loans secured by a dwelling.”
Those credit unions that don’t have a legal entity identifier already assigned to them need to begin that registration process as soon as possible, Christians added.
“Credit unions should be investing time into the review of policies and procedures to ensure they are adequate and meet the requirements of the regulations,” Bow said. “Periodic reviews of processes are also necessary. And just as important, these efforts should be shared within the credit union among staff.”
William G. Berg, VP of compliance training and information at the League of Southeastern Credit Unions
According to William G. Berg, VP of compliance training and information at the League of Southeastern Credit Unions & Affiliates, the biggest challenge in the near future is the Currently Expected Credit Loss rule from the Financial Accounting Standards Board. Currently, the accounting treatment for loan losses is based on loan loss history.
“In the aftermath of the Great Recession, some credit unions and other financial institutions did not have enough reserves to cover losses,” he elaborated. “This rule could reduce the amount of loans that credit unions will be able to make to people of modest means and slow economic growth in the U.S.”
His recommendation? Build capital as quickly as possible.
“When the CECL rules come into effect, credit unions will be allowed to make a one-time transfer from retained earnings to an allowance for loan loss account,” Berg said. “Some credit unions may need to move as much as 1 percent, 2 percent or even 3 percent of net worth into an allowance account to avoid Prompt Corrective Action rules if net worth ratio falls below 7 percent. Having a minimum net worth at 10 percent seems both reasonable and prudent.”
And, siad Berg, credit unions aren't just struggling with the pace of regulations, but the one-size-fits-all approach to regulation.
But one source of relief may come from the NCUA itself. Berg pointed out that the NCUA’s insurance fund has operated for many years between 1.20 percent and 1.30 percent of insured shares. The regulator has proposed to close the Temporary Corporate Credit Union Stabilization Fund four years early and merge it with the National Credit Union Share Insurance Fund. Because the NCUSIF would be adding liabilities from the Stabilization Fund, the proposal calls for a new normal operating level of 1.39 percent. NCUA estimates credit unions could see a distribution of $600 million to $800 million in Q2 2018.
“One action that credit unions should take is to comment on this conservative treatment of the insurance fund,” Berg suggested, adding that now is also the time to build capital so they will not be forced to turn off the “lending spigot.”
David Curtis, director of compliance services at the Northwest Credit Union Association
Credit unions should also prioritize training new staff as long-term compliance experts begin to retire, according to David Curtis, director of compliance services at the Northwest Credit Union Association.
“There is a lot of competition for compliance officers, so credit unions need to be looking into ways to develop their own staff,” Curtis observed. “Compliance needs the continued support of senior management. While there is a cost associated with compliance, the cost of non-compliance is much larger. The culture of compliance needs to extend throughout the enterprise.”
Kimberly Stewart, manager of public relations at the Ohio Credit Union League
While NAFCU, CUNA and the state leagues are constantly advocating on behalf of their member credit unions, it’s still important that CUs take an active role in this process, many sources said.
Kimberly Stewart, public relations manager at the Ohio Credit Union League, urged credit union executives to schedule meetings with legislators — especially right now, as many lawmakers will return to their home districts during the traditional August recess. Filing comment letters with regulators is also key, the experts said. Indeed, Stewart urged credit unions to make the most of the opportunity to do so because “the more voices a regulatory agency hears regarding an issue, the more it listens and considers making changes.”
Speaker of the House Paul Ryan (R-WI), House Minority Leader Nancy Pelosi (D-CA) and Senate Majority Leader Mitch McConnell (R-KY) attend an enrollment ceremony for the Every Student Succeeds Act at the U.S. Capitol in Washington December 14, 2015. REUTERS/Joshua Roberts
Brandy Bruyere, VP of regulatory compliance at the National Association of Federally-Insured Credit Unions
According to NAFCU VP of regulatory compliance Brandy Bruyere, "prioritization" will help credit unions -- so having a plan over the course of the next year for all of the aforementioned deadlines will be "critical" so that each task can be completed on time.
"Determining how each rule change impacts a particular credit union's operations is a good starting point," she added. "NAFCU also develops resources for our members to help them get an idea of how a rule may impact their credit union although going over the regulations individually is also an important step."
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