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Compliance Update with Amy K by Amy Kleinschmit, Chief Compliance Officer NCUA Board Meeting The National Credit Union Administration (NCUA) met yesterday and approved two final rules and extended the 18 percent interest rate ceiling for loans made by federal credit unions for a new eighteen-month period from September 11, 2021, through March 10, 2023. One of the final rules the NCUA approved was to remove the prohibition on the capitalization of interest in connection with loan workouts and modifications. This final rule can be found here and is effective 30 days after it is published in the federal register. Appendix B to Part 741 establishes requirements for the management of loan workout arrangements, loan nonaccrual, and regulatory reporting of troubled debt restructured loans. The NCUA is amending Appendix B to remove the prohibition on the capitalization of interest in connection with loan workouts and modifications. The final rule continues to provide that a FICU may not, under any event, authorize additional advances to finance credit union fees and commissions. FICUs will be permitted to continue to make advances to cover third party fees to protect loan collateral, such as force placed insurance or property taxes. The final rule added policy requirements should a credit union permit capitalization of unpaid interest. The policy must require: The final rule added policy requirements should a credit union permit capitalization of unpaid interest. Among the policy requirements include, compliance with all applicable federal and state consumer protection laws and regulations and documentation that reflects a borrower’s ability to repay, a borrower’s source(s) of repayment, and when appropriate, compliance with the FICU’s valuation policies at the time the modification is approved. The policy must also require the credit union to provide borrowers with written disclosures. The credit union must appropriately report the loan status for modified loans in accordance with applicable law and accounting practices. Furthermore, prudent policies and procedures to help borrowers resume affordable and sustainable repayments that are appropriately structured, while at the same time minimizing losses to the credit union; appropriate safety and soundness safeguards to prevent the following: i. Masking deteriorations in loan portfolio quality and understating charge-off levels, delaying loss recognition resulting in an understated allowance for loan and lease losses account or inaccurate loan valuations; overstating net income and net worth (regulatory capital) levels; and circumventing internal controls. Please note that North Dakota administrative rules continue to prohibit the capitalization of interest under 13-03-28-02(1)(e) for North Dakota state chartered credit unions. CECL The NCUA also approved a final rule, found here, to assist with transition of federally insured credit unions (FICUs) to the current expected credit loss (CECL) methodology required under Generally Accepted Accounting Principles (GAAP). This rule is effective 30 days after it is published in the federal register. The final rule adds a new subpart G to the PCA regulations in 12 CFR part 702, captioned “CECL Transition Provisions.” New subpart G applies to FICUs that meet the eligibility criteria specified in the final rule. Notwithstanding the CECL transition provisions, all other aspects of part 702 would continue to apply. The final rule provides that, for purposes of determining a FICU’s net worth classification under the prompt corrective action (PCA) regulations, the NCUA will phase in the day-one adverse effects on regulatory capital that may result from adoption of CECL. FICUs that have not adopted CECL prior to their first fiscal year beginning after December 15, 2022 (the implementation date established by FASB) are eligible for the phase-in. Furthermore, the NCUA notes that eligibility for the transition provision is limited to those FICUs for which the phase-in is truly necessary—that is, they will experience a reduction in retained earnings as a result of CECL. BSA/AML Examination Manual Updates The Federal Financial Institutions Examination Council (FFIEC) recently released updates to four more sections of the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual (Manual). As you may recall updates were previously made in April 2020 and February 2021. Among these prior updates were revised content in the Customer Identification Program, Currency Transaction Reporting, and Transactions of Exempt Persons sections under Assessing Compliance with BSA Regulatory Requirements. The recent updates relate to revised content in the Purchase and Sale of Monetary Instruments Recordkeeping, Special Measures, Reports of Foreign Financial Accounts, and International Transportation of Currency or Monetary Instruments Reporting sections under Assessing Compliance with BSA Regulatory Requirements. The revisions were made to ensure language clearly distinguishes between mandatory regulatory requirements and considerations set forth in guidance or supervisory expectations. Further, the revisions incorporate regulatory and other changes since the last update of the Manual in 2014. These updated sections provide further transparency into the BSA/AML examination process and do not establish new requirements. The FFIEC revised the sections in close collaboration with Treasury’s Financial Crimes Enforcement Network (FinCEN). CFPB and MLA Consumer Financial Protection Bureau (CFPB) recently issued an Interpretative Rule on its authority to resume examinations regarding the Military Lending Act (MLA). As some credit unions may recall, the CFPB had previously discontinued MLA-related examination activities, based on its stated belief that Congress did not specifically confer examination authority on the CFPB with respect to the MLA. As stated in the press release, the current CFPB leadership does not find those prior beliefs persuasive and the CFPB will now resume MLA-related examination activities. NACHA FAQs – Returning PPP ACH credit NACHA recently updated its FAQs to include guidance on returning a suspected fraudulent PPP ACH credit. Question: If an RDFI is returning a Paycheck Protection Program (PPP) ACH credit entry because the RDFI believes the entry is fraudulent, what Return Reason Code should the RDFI use? Answer: If an RDFI makes the decision to return an ACH credit entry related to the Paycheck Protection Program because the RDFI believes the entry was initiated due to fraud, the RDFI should select the Return Reason Code that most closely approximates the reason for the return. In this scenario, Return Reason Code R03 (No Account/Unable to Locate Account), R17 (File Record Edit Criteria/Entry with Invalid Account Number Initiated Under Questionable Circumstances), or R23 (Credit Entry Refused by Receiver) may be acceptable options. Please note that this use of R17 requires “QUESTIONABLE” to be inserted in the first twelve positions of the Addenda Record. RDFIs can make a business decision to return these credit entries outside of the standard return timeframe. Due to the circumstances and the lenders’ desire to recoup the funds, it is unlikely that the return of credits will be dishonored as untimely. Contact Amy Kleinschmit at akleinschmit@dakcu.org with any compliance related questions.
Compliance Update with Amy K
by Amy Kleinschmit, Chief Compliance Officer
The National Credit Union Administration (NCUA) met yesterday and approved two final rules and extended the 18 percent interest rate ceiling for loans made by federal credit unions for a new eighteen-month period from September 11, 2021, through March 10, 2023.
One of the final rules the NCUA approved was to remove the prohibition on the capitalization of interest in connection with loan workouts and modifications. This final rule can be found here and is effective 30 days after it is published in the federal register. Appendix B to Part 741 establishes requirements for the management of loan workout arrangements, loan nonaccrual, and regulatory reporting of troubled debt restructured loans.
The NCUA is amending Appendix B to remove the prohibition on the capitalization of interest in connection with loan workouts and modifications. The final rule continues to provide that a FICU may not, under any event, authorize additional advances to finance credit union fees and commissions. FICUs will be permitted to continue to make advances to cover third party fees to protect loan collateral, such as force placed insurance or property taxes.
The final rule added policy requirements should a credit union permit capitalization of unpaid interest. The policy must require:
The final rule added policy requirements should a credit union permit capitalization of unpaid interest. Among the policy requirements include, compliance with all applicable federal and state consumer protection laws and regulations and documentation that reflects a borrower’s ability to repay, a borrower’s source(s) of repayment, and when appropriate, compliance with the FICU’s valuation policies at the time the modification is approved. The policy must also require the credit union to provide borrowers with written disclosures. The credit union must appropriately report the loan status for modified loans in accordance with applicable law and accounting practices. Furthermore, prudent policies and procedures to help borrowers resume affordable and sustainable repayments that are appropriately structured, while at the same time minimizing losses to the credit union; appropriate safety and soundness safeguards to prevent the following: i. Masking deteriorations in loan portfolio quality and understating charge-off levels, delaying loss recognition resulting in an understated allowance for loan and lease losses account or inaccurate loan valuations; overstating net income and net worth (regulatory capital) levels; and circumventing internal controls.
Please note that North Dakota administrative rules continue to prohibit the capitalization of interest under 13-03-28-02(1)(e) for North Dakota state chartered credit unions.
CECL
The NCUA also approved a final rule, found here, to assist with transition of federally insured credit unions (FICUs) to the current expected credit loss (CECL) methodology required under Generally Accepted Accounting Principles (GAAP). This rule is effective 30 days after it is published in the federal register.
The final rule adds a new subpart G to the PCA regulations in 12 CFR part 702, captioned “CECL Transition Provisions.” New subpart G applies to FICUs that meet the eligibility criteria specified in the final rule. Notwithstanding the CECL transition provisions, all other aspects of part 702 would continue to apply.
The final rule provides that, for purposes of determining a FICU’s net worth classification under the prompt corrective action (PCA) regulations, the NCUA will phase in the day-one adverse effects on regulatory capital that may result from adoption of CECL.
FICUs that have not adopted CECL prior to their first fiscal year beginning after December 15, 2022 (the implementation date established by FASB) are eligible for the phase-in. Furthermore, the NCUA notes that eligibility for the transition provision is limited to those FICUs for which the phase-in is truly necessary—that is, they will experience a reduction in retained earnings as a result of CECL.
BSA/AML Examination Manual Updates
The Federal Financial Institutions Examination Council (FFIEC) recently released updates to four more sections of the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual (Manual).
As you may recall updates were previously made in April 2020 and February 2021. Among these prior updates were revised content in the Customer Identification Program, Currency Transaction Reporting, and Transactions of Exempt Persons sections under Assessing Compliance with BSA Regulatory Requirements.
The recent updates relate to revised content in the Purchase and Sale of Monetary Instruments Recordkeeping, Special Measures, Reports of Foreign Financial Accounts, and International Transportation of Currency or Monetary Instruments Reporting sections under Assessing Compliance with BSA Regulatory Requirements.
The revisions were made to ensure language clearly distinguishes between mandatory regulatory requirements and considerations set forth in guidance or supervisory expectations. Further, the revisions incorporate regulatory and other changes since the last update of the Manual in 2014. These updated sections provide further transparency into the BSA/AML examination process and do not establish new requirements. The FFIEC revised the sections in close collaboration with Treasury’s Financial Crimes Enforcement Network (FinCEN).
CFPB and MLA
Consumer Financial Protection Bureau (CFPB) recently issued an Interpretative Rule on its authority to resume examinations regarding the Military Lending Act (MLA).
As some credit unions may recall, the CFPB had previously discontinued MLA-related examination activities, based on its stated belief that Congress did not specifically confer examination authority on the CFPB with respect to the MLA.
As stated in the press release, the current CFPB leadership does not find those prior beliefs persuasive and the CFPB will now resume MLA-related examination activities.
NACHA FAQs – Returning PPP ACH credit
NACHA recently updated its FAQs to include guidance on returning a suspected fraudulent PPP ACH credit.
Question: If an RDFI is returning a Paycheck Protection Program (PPP) ACH credit entry because the RDFI believes the entry is fraudulent, what Return Reason Code should the RDFI use?
Answer: If an RDFI makes the decision to return an ACH credit entry related to the Paycheck Protection Program because the RDFI believes the entry was initiated due to fraud, the RDFI should select the Return Reason Code that most closely approximates the reason for the return. In this scenario, Return Reason Code R03 (No Account/Unable to Locate Account), R17 (File Record Edit Criteria/Entry with Invalid Account Number Initiated Under Questionable Circumstances), or R23 (Credit Entry Refused by Receiver) may be acceptable options. Please note that this use of R17 requires “QUESTIONABLE” to be inserted in the first twelve positions of the Addenda Record. RDFIs can make a business decision to return these credit entries outside of the standard return timeframe. Due to the circumstances and the lenders’ desire to recoup the funds, it is unlikely that the return of credits will be dishonored as untimely.
Contact Amy Kleinschmit at akleinschmit@dakcu.org with any compliance related questions.