2012 AND BEYOND A CAPITOL PERSPECTIVE ASSOCIATION of CREDIT UNION INTERNAL AUDITORS 22nd ANNUAL CONFERENCE Denver, Colorado June 20, 2012 Presented by: Fred R. Becker, Jr. President and CEO National Association of Federal Credit Unions
Legislative Issues Regulatory Issues The Future OVERVIEW
Taxation Member Business Lending Housing Finance Reform Data Security Regulatory Reform Capital/PCA Reform Interchange Patent Reform Postal Reform CFPB Privileged Information Bill ATMs Flood Insurance LEGISLATIVE ISSUES
Taxation Concern Over the Deficit Increasing • The President’s “Economic Recovery Advisory Board” raised the idea of removing the credit union tax exemption • President’s Debt Reduction Commission called for elimination of all tax expenditures - Commission report fell short of the 14 votes needed to formally recommend to Congress triggering, on January 1, 2013: $1.2 trillion in automatic cuts over two year (9% of DoD and 9% of non- defense budget (Social Security, Medicare, Food Stamps, and Federal Retirement Programs exempt)). • Senate bipartisan “Gang of Six” tried to reach deal based off of Commission report but efforts lost steam
Taxation • Bush Tax Cuts • • Expire at the end of 2012 • • Top federal income tax rate will increase from 35% to 39.6% and the 33% bracket will • increase to 36% • • Dividends will be taxed according to one’s income tax bracket – top rate of 39.6% as • opposed to current 15% rate. • • Capital gains will be taxed at 20% as opposed to 15%. • ObamaAffordable Health Care Act • • Effective January 1, 2013 • • An additional 3.8% tax (on the lesser of the couples modified adjusted gross income • above $250,000 and their unearned income) on couples with adjusted gross incomes • above $250,000 • • An additional .9% tax on couples with wages above $250,000.
Taxation Source: The Washington Post
Member Business Lending S. 2231, “The Small Business Lending Enhancement Act of 2011” • First introduced 3/8/11 by Senators Udall (D-CO) and Snowe (R-ME) as S. 509 • Reintroduced as S. 2231 on 3/22/12 to set up potential floor vote • Senate Majority Leader Reid: “We will have a vote on this” • 21 bipartisan co-sponsors • Senate floor vote possible in late April – early May; 60 votes needed • Endorsed by Treasury and NCUA
Member Business Lending • S. 509/S. 2231/H.R. 1418 would: • • Raise the cap to 27.5% for credit unions that meet certain key criteria • (with no more than 30% growth allowed per year) • • Key criteria: • - Near the current limit for four consecutive quarters • - Well-capitalized • - Have at least five consecutive years of experience in underwriting • and servicing member business loans • - Have strong policies and experience in managing member • business lending loans • - Satisfy other standards established by NCUA to maintain the • safety and soundness • • NCUA to report to Congress semi-annually • • GAO study after three years
Member Business Lending H.R. 1418, “The Small Business Lending Enhancement Act of 2011” • Introduced 4/7/11 by Representatives Royce (R-CA) and McCarthy (D-NY) • House companion to the Senate bill • 136 additional bipartisan co-sponsors as of 5/30/12 H.R. 4293, “The Restore Main Street’s Credit Act of 2012” • Introduced 3/28/12 by Representative Kurt Schrader (D-OR) • Exempts MBLs made to companies with under 20 FTE’s from MBL cap
Housing Finance/GSE Reform • Key Item in the 113th Congress • • Both the HFSC and the Senate Banking Committee have held • hearings; action unlikely this Congress • • Administration released white paper with three options for reform of • Housing Finance and GSE’s in February • - All 3 approaches could put the secondary market in the hands of big • banks
Housing Finance/GSE Reform NAFCU Principles on Reform Secondary Mortgage Market • At least two Government Sponsored Enterprises (GSEs). • Uninterrupted access during any transition • Against full privatization GSE Structure • Model consistent with a cooperative or mutual entities model. • Regulated by the Federal Housing Finance Agency • Required to meet strong capital standards • Elected Board of Directors. • Meet appropriate regulatory standards to limit their ability to take on risk while ensuring safety and soundness. • Rigorous oversight
Housing Finance/GSE Reform NAFCU Principles on Reform (Continued) Funding • Self-funded, without any dedicated government appropriations. Government’s Role • Explicit guarantee on the payment of principal and interest • Access to FHLBs Guidance • Credit Union representation on a board of mortgage industry
Data Security S. 1151, “Personal Data Privacy and Security Act of 2011” S. 1207, “Data Security and Breach Notification Act of 2011” S. 1408, “Data Breach Notification Act” S. 1434, “The Data Security Act of 2011” S. 1535, “Personal Data Protection and Breach Accountability Act of 2011” S. 2105, “Cybersecurity Act of 2012” S. 2111, “Cyber Crime Protection Security Act” H.R. 2577, “The SAFE Data Act” H.R. 1707, “Data Accountability and Trust Act” H.R. 1841, “Data Accountability and Trust Act (DATA) of 2011”
Data Security Provisions NAFCU Seeks • Payment of Breach Costs by Breached Entities - Require merchants to be accountable for costs of data breaches that result on their end, especially when their own negligence is to blame • National Standards for Safekeeping Information - Require any business entity responsible for the storage of consumer data to meet standards similar to those imposed on financial institutions under the Gramm-Leach-Bliley Act • Data Security Policy Disclosure - Require merchants to post their data security policies at the point of sale if they take sensitive financial data
Data Security Provisions NAFCU Seeks (Continued) • Timely Disclosure of Breached Entity - Mandated disclosure of identities of companies and merchants whose data systems have been violated, so consumers are aware of those that place their personal information at risk. • Enforcement of Prohibition on Data Retention - Violation of existing agreements and law by merchants and retailers who retain payment card information electronically must be addressed. • Burden of Proof in Data Breach Cases - Evidentiary burden of proving a lack of fault should rest with the merchant or retailer who incurred the breach.
Dodd-Frank/Regulatory Reform Consumer Financial Protection Bureau • Recess appointment of Richard Cordray as Director - Legal challenges to Cordray’s appointment have no impact on credit unions • Congressional Initiatives - House & Senate Republicans continue to push for structural changes to the CFPB. -- Replace the CFPB Director with a 5-person board -- Make it easier for FSOC to “veto” CFPB rules -- Bring the CFPB under the annual Congressional appropriations process.
Dodd-Frank/Regulatory Reform Privileged Information • Identical bipartisan legislation in both chambers (H.R. 4014/S.2099) • Ensures privileged information provided by financial institutions to the CFPB will be kept confidential • Privacy protection from third parties critical and consistent with current statute regarding credit union information sharing and the NCUA • Passed House on 3/26/12, delayed in the Senate.
Capital Issues H.R. 3993, “The Capital Access for Small Businesses and Jobs Act” • Derived from principles adopted at NAFCU-CUNA meeting during NAFCU’s 2010 Congressional Caucus • Would allow the NCUA to authorize accounts that: - Do not alter the cooperative nature of the credit union; - Are uninsured; - Are subordinate to all other claims against the credit union including the claims of creditors, shareholders, and the Fund; - Are available to be applied to cover operating losses of the credit union in excess of its retained earnings and to the extent so applied, will not be replenished; - Are subject to maturity limits as determined by the Board; and - Are offered by a credit union that is determined by the Board to be sufficiently capitalized and well-managed.
Debit Interchange H.R. 3156, “The Consumer Debit Card Protection Act” • Repeals the Durbin Amendment
Debit Interchange –The Vote Senators Supporting Credit Unions & Voting for Tester-Corker Alexander (R-TN) Ayotte (R-NH) Blunt (R-MO) Boozman (R-AR) Coats (R-IN) Coburn (R-OK) Cochran (R-MS) Corker (R-TN) Cornyn (R-TX) Crapp (R-ID) DeMint (R-SC) Hatch (R-UT) Heller (R-NV) Hoeven (R-ND) Hutchison (R-TX) Inhofe (R-OK) Johanns (R-NE) Johnson (R-WI) Kirk (R-IL) Kyl (R-AZ) Lee (R-UT) McCain (R-AZ) McConnell (R-KY) Moran (R-KS) Murkowski (R-AK) Paul (R-KY) Portman (R-OH) Risch (R-ID) Roberts (R-KS) Rubio (R-FL) Sessions (R-AL) Shelby (R-AL) Thune (R-SD) Toomey (R-PA) Wicker (R-MS) Webb (D-VA) Akaka (D-HI) Baucus (D-MT) Begich (D-AK) Bennet (D-CO) Carper (D-DE) Coons (D-DE) Gillibrand (D-NY) Hagan (D-NC) Johnson (D-SD) Manchin (D-WV) McCaskill (D-MO) Mikulski (D-MD) Nelson (D-FL) Nelson (D-NE) Schumer (D-NY) Stabenow (D-MI) Tester (D-MT) Warner (D-VA)
Patent Reform H.R. 1249, “The Leahy-Smith America Invents Act” • Both House and Senate passed comprehensive patent reform bill • Significantly reduces patent infringement suits against financial services providers • Signed into law on 9/16/11
CFPB NCUA Housing Litigation Regulatory Compliance REGULATORY ISSUES
Consumer Financial Protection Bureau (CFPB) “State attorneys general will be an important partner for the Bureau because they understand as well as anyone the kinds of problems that consumers – their constituents – face. There’s another reason, too: Congress has emphasized that we are to enforce Federal consumer financial law consistently …. That … will require the sustained collaboration of State and Federal regulators, including both the consumer bureau and State attorneys general.” Richard Cordray Director, CFPB A Level Playing Field for Consumer Financial Products and Services March 8, 2012
Consumer Financial Protection Bureau (CFPB) “My vision for the Consumer Bureau is that it will work to make consumer financial markets operate fairly … to protect consumers, support honest businesses, and play a crucial role in helping to safeguard the economy. First, the Consumer Bureau will benefit consumers by clarifying the prices and risks of consumer products and services. Second, the Consumer Bureau will benefit honest business by leveling the playing field and ensuring that financial institutions play by the same set of rules. Finally, the Bureau's efforts can help strengthen our nation’s economy.”Richard Cordray Director, CFPB Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs, U.S. House of Representatives January 24, 2012
Consumer Financial Protection Bureau (CFPB) “By requiring the CFPB to examine nonbanks, the Dodd-Frank Act – the law that established the CFPB – sought to ensure that consumers get the benefit of federal consumer financial laws on a consistent basis. This consistent supervisory coverage will help level the playing field for all industry participants to create a fairer marketplace for consumers and the responsible businesses that serve them.” Richard Cordray Director, CFPB The Brookings Institution January 5, 2012
Consumer Financial Protection Bureau (CFPB) • So is the ultimate goal to level the playing field between small and large institutions? There is obviously tension between the big banks and the small banks on that question. • “Well, in most of the consumer markets, you take the largest institutions, and you're talking about 80, 85, 90% market share. I just think that it makes sense for us to consider carefully what burdens we're imposing on different types of institutions and be a little bit nuanced about that.” • Richard Cordray Director, CFPB Trying to Stay Above the Politics: A Conversation with Richard Cordray • American Banker • March 23, 2012 (Continued)
Consumer Financial Protection Bureau (CFPB) CFPB Authority To Regulate Prices In response to a question following his prepared remarks at the Community Bankers Association Annual Meeting on March 21, 2012 CFPB Director Richard Cordray responded that the CFPB lacked both usury authority and the ability to regulate fees. Instead, he noted that the bureau’s focus will be on ensuring consumers understand the fees that they will incur. (Continued)
Consumer Financial Protection Bureau (CFPB) • Consumer Laws Implemented by the Agency • • Regulation B – Equal Credit Opportunity Act • • Regulation C – Home Mortgage Disclosure Act • • Regulation D – Alternative Mortgage Transaction Parity • • Regulation E – Electronic Funds Transfers • • Regulation F – Fair Debt Collection Practices Act • • Regulation G – S.A.F.E. Mortgage Licensing Act (Federal) • • Regulation M – Consumer Leasing • • Regulation N – Mortgage Acts and Practices Advertising • • Regulation P – Privacy of Consumer Financial Information • • Regulation V – Fair Credit Reporting • • Regulation X – Real Estate Settlement Procedures Act • • Regulation Z – Truth in Lending • • Regulation DD – Truth in Savings • Regulations Not Transferred to the Agency • • Regulation D − Reserve Requirements • • Regulation CC • • Regulation GG − Unlawful Internet Gambling Enforcement Act
Consumer Financial Protection Bureau (CFPB) • Ability to prohibit “unfair, deceptive or abusive acts or practices • Unfair • - Causes or is likely to cause substantial injury to consumers; • - Injury is not reasonably avoidable by consumers; and, • - Injury is not outweighed by countervailing benefits to consumers or to • competition. • Deceptive • - Representation, omission, act of practice misleads or is likely to • mislead consumers; • - Consumers’ interpretation of the representation, omission, act or • practice is reasonable under the circumstances; and • - The misleading representation, omission, act or practice is material
Consumer Financial Protection Bureau (CFPB) • Ability to prohibit “unfair, deceptive or abusive acts or practices” (Continued) • Abusive • Materially interferes with the ability of consumers to understand a term or condition of a financial product or service; or • Takes unreasonable advantage of: • A lack of understanding on the part of a consumer of the material risks, cost, or conditions of the product or service • The inability of consumers to protect this interests in selecting or using a consumer financial product or service; or • The reasonable reliance by the consumer on a covered person to act in the interest of the consumer. (Continued)
Consumer Financial Protection Bureau (CFPB) • Will the CFPB give any guidance specifically on what UDAAP means? • “We have given some exam guidance around these concepts, and I think maybe we'll have more to say over time. I don't anticipate us writing a rule around UDAAP.” • So people will mostly have to look at your actions as the model for how this new term is defined? • “I think that's probably right. The law is, I think, pretty well-defined out there, and it was pretty significantly defined by Congress as well.” • Richard Cordray Director, CFPB Trying to Stay Above the Politics: A Conversation with Richard Cordray • American Banker • March 23, 2012 (Continued)
Consumer Financial Protection Bureau (CFPB) • Current Initiatives: • • Confidential Treatment of Privileged Information • • Remittances • - Insured depository financial institutions temporarily exempt until 7/21/15 • • TILA-RESPA Disclosure/Settlement Disclosure Forms • - Model Disclosure Form • - Cost of funds disclosure • • QM (Ability to ability-to-repay) a mortgage loan • • Overdraft Protection Programs • - Model disclosure form
Consumer Financial Protection Bureau (CFPB) • Current Initiatives (Continued): • • Mortgage Servicers • • Student Loans • • Streamlining Inherited Regulations • • Collection of Credit Card, Mortgage, Student Loan, Bank • Account/Service, Vehicle, and Consumer Loan Data • • Arbitration Clauses • • Vendor Compliance • • Disparate Impact • • Prepaid Cards
Consumer Financial Protection Bureau (CFPB) • Consumer Advisory Council • • The CFPB is setting up a consumer advisory council (CAC), that will • consist of approximately 20 individuals with a background in • consumer protection, financial services, consumer products and • services, fair lending, civil rights, and community development. The • Council will offer advice and consult with agency officials regarding • consumer protection issues. • Credit Union Advisory Panel • • The bureau has also indicated it plans to set up a credit union • advisory panel consisting of up credit union professionals. There are • no guidelines for the panel yet, however, the bureau intends to use • the panel to help inform its rulemaking process and other functions. • • The bureau has not yet begun formally setting up the panel.
Consumer Financial Protection Bureau (CFPB) • Consumer Complaints • • The CFPB and the NCUA have entered into a Memorandum of • Understanding relating to the treatment of consumer complaints. • • NCUA’s Office of Consumer Protection (OCP) is processing credit • union complaints, but is about 3 to 4 months behind in handling the • cases.
NCUA • Final Rules • • Concentration Risk/Interest Rate Risk • • TDR/Loan Workout Policy • ProposedDodd-Frank Related Rules • • $1/$10 billion incentive disclosure rule • • Appraisal management rule • • Credit rating agencies rule • Other proposed Rules • • Loan Participations • • Central Liquidity Facility (CLF) • • Credit Union Service Organizations (CUSOs) • • Derivatives • The NCUA’s National Supervisory Exam Manual • • Examiner’s Guide
NCUA • Advice Given During Level 4 New Examiner Training • • Begin in a friendly way • • Let others do a great deal of the talking • • See things from their point of view • • Be sympathetic with other’s ideas and desires • • Slow down, give Reviewing identified specific risks and discussing how • those identified will be resolved. • Steps To Contribute To A Conducive Exam Environment • • Discussing expectations • • Setting Ground rules and the exam approach upfront • • Agreeing to a regular update schedule during the examination to eliminate • surprises • • Coordinating how examiners and credit union staff will interact • • Reviewing identified specific risks and discussing how those identified will be • resolved. • Larry Fazio • A Dialogue on the Exam Process • The NCUA Report, April 2012 • Director, Office of Examination and Insurance National Credit Union Administration
NCUA • Stabilization Assessment • • The NCUA Board’s estimate of 7-12 basis points (depending on • share growth) in 2012 for the corporate stabilization and NCUSIF • assessments still holds. • • A revised projection for the remaining assessments over the life of • the Stabilization Fund ranges from $1.9 billion to $6.2 billion.
NCUA • Corporate Credit Unions Capital Requirements • • Includes three minimum capital ratio benchmarks and a retained earnings • (RE) component that will start gradually increasing in 2013. • • Benchmarks • 4% minimum leverage ratio (5% to be well-capitalized) by 10/20/11 • After 10/20/2011, the minimum leverage ratio plus number (2) & (3) below; • (2) 4% tier one risk-based capital ratio (6% to be well-capitalized) • (3) 8% total risk-based capital ratio (10% to be well-capitalized) • • Temporary Corporate Credit Union Share Guarantee Expires December 31, • 2012
Housing • FHFA Foreclosure Mitigation • FHA Forgiveness Period • Mortgage Servicing Compensation • Escrows for “higher priced loans” • Mortgage interest deduction • Settlement with major servicers • Mortgage Electronic Registration System (MERS) • Qualified Residential Mortgages (QRM)
Litigation National Retail Federation v. Federal Reserve on Interchange fees Hudson Valley FCU NCUA • Five pending lawsuits against the securities firms of Wachovia, JP Morgan Securities, RBS Securities, and Goldman Sachs. • Settled to date: Deutsche Bank Securities ($145M), Citigroup ($20.5M), and HSBC ($5.25M) ATMs • Fee Notices • ADA Compliance Overdraft Fees
Regulatory Compliance “Nine Dangerous Words: ‘Show Me Where It Says We Can’t Do That’” Jo Ann S. Barefoot BankThink September 13, 2011 Former Comptroller of the Currency Co-Chair, Treliant Risk Advisors
Regulatory Compliance “Today, when a customer has a positive or negative experience, they take to the Internet. They post it on Facebook and Twitter …. ” Sam Boonin Vice President of Product Engagement Zendesk
Important Compliance Dates March 15, 2012 – Americans with Disabilities Act & ATMs • Speech Output requirement applies to all existing ATMs • Physical Access requirements only apply to ATMs that are altered after March 15, 2012 • Given that the ATMs currently comply with the 1991 ADA Standards • Physical Access requirements apply to any new ATMs added after March 15, 2012 April 1, 2012 – Unaffiliated Network Requirement • Stems from Durbin Amendment (Regulation II) • Requires two unaffiliated networks • Example: One PIN network, One Signature network
Important Compliance Dates April 30, 2012 – National Labor Relations Board Notice • All private employers need to post an employee rights poster • Notice informs employees of right to unionize • No exclusion for credit unions • FAQs at www.nlrb.gov/faq/poster. Poster to download and print at www.nlrb.gov/poster. July 1, 2012 – Mandatory E-Filing of BSA Reports • E-Filing required for all Currency Transaction Reports and Suspicious Activity Reports September 30, 2012 – Interest Rate Policy • NCUA final rule requires written interest rate risk policy and management program • Policy must be approved by CU’s Board January 1, 2013 – Tracking of Interest Payments to Nonresident Aliens • IRS Forms 1042-S must be submitted for 2013 in 2014 February 7, 2013 – Remittance Transfers • New disclosure requirements from the CFPB
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