ARTICLE
Compliance Update with Amy K by Amy Kleinschmit, Chief Compliance Officer FREE WEBINARS May 24 – Emergency Capital Investment Program. Registration can be found here. Eligible credit unions interested in applying for the Emergency Capital Investment Program now have until July 6 to submit their applications. Under the Emergency Capital Investment Program, Treasury will provide up to $9 billion in capital directly to depository institutions that are certified Community Development Financial Institutions or minority depository institutions. This funding may be used to provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers—especially those in low-income and underserved communities—that may be disproportionately impacted by the economic effects of the COVID-19 pandemic. May 26 – NCUA, CISA Cybersecurity Webinar. Registration can be found here. Staff from the NCUA and the Cybersecurity and Infrastructure Security Agency will discuss: Identifying risks to products, services, and assets; Monitoring the security of networks; Managing third-party cyber risks; Implementing controls to protect and, if necessary, recover data; and Monitoring and protecting against malware attacks. May 27 – CDFI Small Dollar Loan Program. Registration can be found here. Staff from the NCUA and the CDFI Fund will describe the program and discuss eligibility and permissible uses of these funds. A question-and-answer session will follow the presentation. Credit unions should review the CDFI Fund’s Small-Dollar Loan Program, including information about the application process and timeline. LIBOR Transition The NCUA recently issued Letter to Credit Unions 21-CU-03 regarding LIBOR transition. As stressed in the letter, “the NCUA encourages all federally insured credit unions to transition away from using the U.S. dollar LIBOR settings as soon as possible, but no later than December 31, 2021.” The NCUA also attached Supervisory Letter SL No. 21-01 that discusses potential LIBOR exposure and replacement alternatives. Credit unions use LIBOR in a variety of products, including derivatives, business loans, consumer loans, variable rate notes, and securitizations, such as mortgage-backed securities. Credit unions may have LIBOR exposure in these types of transactions as well as Federal Home Loan Bank (FHLB) borrowings and various other member share products that use a variable interest rate. CFPB – TRID FAQs The Consumer Financial Protection Bureau (CFPB) recently added FAQs to the list to help clarify certain aspects of the TILA-RESPA Integrated Disclosure Rule (TRID) regarding the impact the BUILD Act had for certain housing assistance loans. All CFPB TRID FAQs can be found here and the recently adds questions can be found under “housing assistance loans.” As discussed in the FAQs - To meet the criteria for the partial exemption from the Loan Estimate and Closing Disclosure requirements under the BUILD Act, the transaction must meet all of the following criteria: The loan must be a residential mortgage loan; The loan must be offered at a 0 percent interest rate; the loan must only have bona fide and reasonable fees, and the loan must be primarily for charitable purposes by an organization described in Internal Revenue Code section 501(c)(3) and exempt from taxation under section 501(a) of that Code. However, those partial exemptions do not affect other required disclosures, such as the Escrow Closing Notice. Interchange Proposed Rulemaking The Federal Reserve Board (Board) issued a proposed rule regarding Regulation II (Debit Card Interchange Fees and Routing) to clarify that debit card issuers should enable, and allow merchants to choose from, at least two unaffiliated networks for card-not-present debit card transactions, such as online purchases. The Board also issued a biennial report summarizing information on debit card transactions in 2019 which can be found here. The proposed rule, which can be found here, and comments must be received by July 12, 2021. As many will recall, the Board issued their final rule in July 2011 regarding prohibitions on network exclusivity and routing restrictions for debit cards as required by the Dodd-Frank Act. Regulation II requires that merchants or their acquirers can choose from at least two unaffiliated networks when routing debit card transactions. At the time of the 2011 final rule, card-not-present transactions, such as online purchases, the market had not developed solutions to broadly support multiple networks over which merchants could choose to route those transactions. Board found that currently merchants are often not able to choose from at least two unaffiliated networks when routing card-not-present transactions. Therefore, the Board is proposing revisions to the commentary to Regulation II that clarify the applicability of the prohibition on network exclusivity to card-not-present transactions. These proposed revisions to the commentary clarify that card-not-present transactions are a particular type of transaction for which two unaffiliated payment card networks must be available. Also, the Board is proposing changes to clarify the responsibility of the debit card issuer in ensuring that at least two unaffiliated networks have been enabled to comply with the regulation’s prohibition on network exclusivity. In other words, the rule will emphasize the issuer’s role in configuring its debit cards to ensure that at least two unaffiliated networks have been enabled to comply with the regulation’s prohibition on network exclusivity. The proposed changes do not affect other parts of Regulation II that directly address interchange fees for certain electronic debit transactions, however, the Board notes that it may propose additional revisions in the future. NCUA Final Rule – Derivatives The NCUA finalized their Derivative’s Rule at yesterday’s board meeting. This Final rule can be found here - AG20210520Item3b.pdf (ncua.gov) and will become effective 30 days after it is published in the Federal Register. As explained by the NCUA, “this final rule will modernize the NCUA’s Derivatives rule and make it more principles-based, while retaining key safety and soundness components. The changes contained herein will provide more flexibility for federal credit unions (FCUs) to manage Interest Rate Risk (IRR) through the use of Derivatives.” The NCUA finalized the rule largely as proposed with a few regulatory changes. The NCUA also clarified a few items in the discussion of the final rule. While commenters disagreed with the proposed $500 million asset size threshold to qualify for an exemption from the requirement to submit an application for Derivatives authority, the NCUA board did not make any changes and this threshold was adopted in the final rule. However, the final rule does not bar FCUs under $500 million from receiving Derivatives authority as an FCU may receive Derivatives authority after completing an application that demonstrates it can safely manage a Derivatives program. With regard to the requirement for a credit union to submit notification to the NCUA within five business days of entering into its first Derivatives transaction, several commenters sought modifications. However, the NCUA kept the requirement in the final rule and stated that “replacing the application requirements for a qualified FCU with a required notification within five days after entering into its first Derivative transaction is a reasonable compromise. Derivatives can be complex and risky transactions, and a prompt notification will allow the applicable Regional Director to efficiently manage examination resources.” Also note, that this notification requirement found under 741.219 extends to all federally insured credit unions. In the proposal, the NCUA noted the rule could be simplified by creating one collateral requirement for both cleared and Non-cleared Derivatives. However, in the final rule, based on comments and further analysis, the NCUA will not implement collateral requirements for cleared Derivatives. Rather, the final rule only requires specific collateral types for Non-cleared Derivatives, otherwise collateral requirements for cleared derivatives are subject to the clearinghouse requirements. The collateral requirements for Non-cleared Derivatives are the same requirements included in the proposed rule. Another change from the proposed rule relates to Counterparties. The NCUA is declining to finalize the proposed change that would require all Counterparties to be domiciled in the United States. As such, the current Counterparty requirements will be effective for the final rule. As explained in the discussion of the final rule, “while the proposed rule moved toward a principles-based approach, the Board explicitly proposed to prohibit an FCU from using written options.” After consideration of the comments and further analysis, the Board is removing the proposed prohibition on written options. As such, this final rule permits an FCU to enter into written options, but only if such options are used to manage IRR. As a result of removing the prohibition on written options and for increased clarity in the rule text, the Board is adding a new § 703.103(a)(1) restating a mandatory characteristic in that Derivatives can only be used for the purpose of managing IRR. The Board is adding this characteristic to reinforce the principle that all Derivatives, including written options, must only be used for the management of IRR. The NCUA stresses that the FCU must be able to demonstrate how the written option, on its own or combined with other Derivatives, is being used to manage interest rate risk. The final rule retained the proposed provisions of § 703.103 for requirements related to the characteristics of permissible IRR Derivatives, including the provision that a Derivative contract must be based on Domestic Interest Rates or the USD London Interbank Offered Rate (LIBOR). Since publication of all USD LIBOR rate settings will cease by June 30, 2023, the NCUA notes that it will consider revisions to this subpart after the cessation of the USD LIBOR. As always, DakCU members may contact Amy Kleinschmit at akleinschmit@dakcu.org with any compliance related questions.
Compliance Update with Amy K
by Amy Kleinschmit, Chief Compliance Officer
FREE WEBINARS
May 24 – Emergency Capital Investment Program. Registration can be found here.
Eligible credit unions interested in applying for the Emergency Capital Investment Program now have until July 6 to submit their applications. Under the Emergency Capital Investment Program, Treasury will provide up to $9 billion in capital directly to depository institutions that are certified Community Development Financial Institutions or minority depository institutions. This funding may be used to provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers—especially those in low-income and underserved communities—that may be disproportionately impacted by the economic effects of the COVID-19 pandemic.
May 26 – NCUA, CISA Cybersecurity Webinar. Registration can be found here.
Staff from the NCUA and the Cybersecurity and Infrastructure Security Agency will discuss: Identifying risks to products, services, and assets; Monitoring the security of networks; Managing third-party cyber risks; Implementing controls to protect and, if necessary, recover data; and Monitoring and protecting against malware attacks.
May 27 – CDFI Small Dollar Loan Program. Registration can be found here.
Staff from the NCUA and the CDFI Fund will describe the program and discuss eligibility and permissible uses of these funds. A question-and-answer session will follow the presentation. Credit unions should review the CDFI Fund’s Small-Dollar Loan Program, including information about the application process and timeline.
LIBOR Transition
The NCUA recently issued Letter to Credit Unions 21-CU-03 regarding LIBOR transition. As stressed in the letter, “the NCUA encourages all federally insured credit unions to transition away from using the U.S. dollar LIBOR settings as soon as possible, but no later than December 31, 2021.”
The NCUA also attached Supervisory Letter SL No. 21-01 that discusses potential LIBOR exposure and replacement alternatives. Credit unions use LIBOR in a variety of products, including derivatives, business loans, consumer loans, variable rate notes, and securitizations, such as mortgage-backed securities. Credit unions may have LIBOR exposure in these types of transactions as well as Federal Home Loan Bank (FHLB) borrowings and various other member share products that use a variable interest rate.
CFPB – TRID FAQs
The Consumer Financial Protection Bureau (CFPB) recently added FAQs to the list to help clarify certain aspects of the TILA-RESPA Integrated Disclosure Rule (TRID) regarding the impact the BUILD Act had for certain housing assistance loans. All CFPB TRID FAQs can be found here and the recently adds questions can be found under “housing assistance loans.”
As discussed in the FAQs - To meet the criteria for the partial exemption from the Loan Estimate and Closing Disclosure requirements under the BUILD Act, the transaction must meet all of the following criteria: The loan must be a residential mortgage loan; The loan must be offered at a 0 percent interest rate; the loan must only have bona fide and reasonable fees, and the loan must be primarily for charitable purposes by an organization described in Internal Revenue Code section 501(c)(3) and exempt from taxation under section 501(a) of that Code. However, those partial exemptions do not affect other required disclosures, such as the Escrow Closing Notice.
Interchange Proposed Rulemaking
The Federal Reserve Board (Board) issued a proposed rule regarding Regulation II (Debit Card Interchange Fees and Routing) to clarify that debit card issuers should enable, and allow merchants to choose from, at least two unaffiliated networks for card-not-present debit card transactions, such as online purchases.
The Board also issued a biennial report summarizing information on debit card transactions in 2019 which can be found here.
The proposed rule, which can be found here, and comments must be received by July 12, 2021.
As many will recall, the Board issued their final rule in July 2011 regarding prohibitions on network exclusivity and routing restrictions for debit cards as required by the Dodd-Frank Act. Regulation II requires that merchants or their acquirers can choose from at least two unaffiliated networks when routing debit card transactions.
At the time of the 2011 final rule, card-not-present transactions, such as online purchases, the market had not developed solutions to broadly support multiple networks over which merchants could choose to route those transactions. Board found that currently merchants are often not able to choose from at least two unaffiliated networks when routing card-not-present transactions.
Therefore, the Board is proposing revisions to the commentary to Regulation II that clarify the applicability of the prohibition on network exclusivity to card-not-present transactions. These proposed revisions to the commentary clarify that card-not-present transactions are a particular type of transaction for which two unaffiliated payment card networks must be available.
Also, the Board is proposing changes to clarify the responsibility of the debit card issuer in ensuring that at least two unaffiliated networks have been enabled to comply with the regulation’s prohibition on network exclusivity. In other words, the rule will emphasize the issuer’s role in configuring its debit cards to ensure that at least two unaffiliated networks have been enabled to comply with the regulation’s prohibition on network exclusivity.
The proposed changes do not affect other parts of Regulation II that directly address interchange fees for certain electronic debit transactions, however, the Board notes that it may propose additional revisions in the future.
NCUA Final Rule – Derivatives
The NCUA finalized their Derivative’s Rule at yesterday’s board meeting. This Final rule can be found here - AG20210520Item3b.pdf (ncua.gov) and will become effective 30 days after it is published in the Federal Register.
As explained by the NCUA, “this final rule will modernize the NCUA’s Derivatives rule and make it more principles-based, while retaining key safety and soundness components. The changes contained herein will provide more flexibility for federal credit unions (FCUs) to manage Interest Rate Risk (IRR) through the use of Derivatives.”
The NCUA finalized the rule largely as proposed with a few regulatory changes. The NCUA also clarified a few items in the discussion of the final rule.
While commenters disagreed with the proposed $500 million asset size threshold to qualify for an exemption from the requirement to submit an application for Derivatives authority, the NCUA board did not make any changes and this threshold was adopted in the final rule. However, the final rule does not bar FCUs under $500 million from receiving Derivatives authority as an FCU may receive Derivatives authority after completing an application that demonstrates it can safely manage a Derivatives program.
With regard to the requirement for a credit union to submit notification to the NCUA within five business days of entering into its first Derivatives transaction, several commenters sought modifications.
However, the NCUA kept the requirement in the final rule and stated that “replacing the application requirements for a qualified FCU with a required notification within five days after entering into its first Derivative transaction is a reasonable compromise. Derivatives can be complex and risky transactions, and a prompt notification will allow the applicable Regional Director to efficiently manage examination resources.” Also note, that this notification requirement found under 741.219 extends to all federally insured credit unions.
In the proposal, the NCUA noted the rule could be simplified by creating one collateral requirement for both cleared and Non-cleared Derivatives. However, in the final rule, based on comments and further analysis, the NCUA will not implement collateral requirements for cleared Derivatives. Rather, the final rule only requires specific collateral types for Non-cleared Derivatives, otherwise collateral requirements for cleared derivatives are subject to the clearinghouse requirements. The collateral requirements for Non-cleared Derivatives are the same requirements included in the proposed rule.
Another change from the proposed rule relates to Counterparties. The NCUA is declining to finalize the proposed change that would require all Counterparties to be domiciled in the United States. As such, the current Counterparty requirements will be effective for the final rule.
As explained in the discussion of the final rule, “while the proposed rule moved toward a principles-based approach, the Board explicitly proposed to prohibit an FCU from using written options.” After consideration of the comments and further analysis, the Board is removing the proposed prohibition on written options. As such, this final rule permits an FCU to enter into written options, but only if such options are used to manage IRR. As a result of removing the prohibition on written options and for increased clarity in the rule text, the Board is adding a new § 703.103(a)(1) restating a mandatory characteristic in that Derivatives can only be used for the purpose of managing IRR. The Board is adding this characteristic to reinforce the principle that all Derivatives, including written options, must only be used for the management of IRR. The NCUA stresses that the FCU must be able to demonstrate how the written option, on its own or combined with other Derivatives, is being used to manage interest rate risk.
The final rule retained the proposed provisions of § 703.103 for requirements related to the characteristics of permissible IRR Derivatives, including the provision that a Derivative contract must be based on Domestic Interest Rates or the USD London Interbank Offered Rate (LIBOR). Since publication of all USD LIBOR rate settings will cease by June 30, 2023, the NCUA notes that it will consider revisions to this subpart after the cessation of the USD LIBOR.
As always, DakCU members may contact Amy Kleinschmit at akleinschmit@dakcu.org with any compliance related questions.