Year After Year NAFCU, Credit Unions Busier With Regulatory Matters; BSA, GAO Report
ARLINGTON, Va. -- NAFCU's regulatory affairs staff has seen some changes over the last few years, but they are keeping on their toes to ensure they represent their members' wishes.
NAFCU Senior Counsel and Director of Regulatory Affairs Carrie Hunt has been with NAFCU more than two years and was promoted to senior counsel about a year ago when General Counsel Bill Donovan left the organization. "In terms of being senior counsel at NAFCU, from time to time, there's litigation so I'll manage that for NAFCU," she said. Her new post has added to her responsibilities, including the American Bankers Association lawsuit against NCUA regarding Members 1st Federal Credit Union, an active NAFCU member. NAFCU is one of the amicii or "friends of the court" in the case. Hunt noted that she was already very familiar with the case because of its regulatory policy implications regarding fields of membership, and specifically community charters. In addition to the legal front, NAFCU has also been entrenched in regulatory affairs and advocacy with no slowdown in sight. "It was a very busy year this past year whether it was an issue evolving out of Congress, the GAO report or looking at service to members, BSA, bird flu...and I expect this coming year to be just as busy but it's exciting," Hunt said. "It's very positive anytime the regulators are drafting rules, we have the opportunity to make sure that credit unions are being represented and to make our voice heard." The new business combination accounting rules, expected in the first half of 2007, are one area where NAFCU and other groups shouted from the rooftops the need to change the Federal Credit Union Act's definition of net worth to avoid unintended consequences. As the law was at the time of the Financial Accounting Standards Board's initial proposal, the continuing credit unions would not have been permitted to count the merging institutions net worth toward its net worth, but that has since been changed. "We look at a couple different aspects," Hunt explained. "One is the issue of whether legislation is potentially needed, like the FASB rule where we had a regulatory issue which turned into a legislative one." By working with FASB to accept the definition change and working through NAFCU's lobbyists, the legislative change was successfully pushed into law as part of last year's Financial Services Regulatory Relief Act. NAFCU Associate Director of Regulatory Affairs Tessema Tefferi, who just started with NAFCU in October, is charged with monitoring FASB's policy on business combinations. He said he expects a final regulation by June because a new board is slated to be installed in July. Hunt added that there could be a delayed effective date. Another item Congress quickly passed onto the president and was signed into law at the end of the 109th Congress was the Department of Defense reauthorization, which included language targeting predatory lenders, but potentially also impacting the regulated entities as well. "Then of course you have the opposite when you have a law that actually goes into effect...How can the regulator make sure that the rule does not negatively affect credit unions?" Hunt asked rhetorically. The Armed Services Committee considered the DoD legislation, but in its haste to get something done, it was not referred to Financial Services, as is usually the course with technical financial issues. The law capped interest rates to military personnel at 36%, but financial institutions have said lack of clarity in the language could create conflict with the Federal Reserve's Regulation Z (Truth in Lending). "We have heard from more of our members on this issue than I can remember in recent history. People forget that it affects all credit unions, not just defense credit unions," according to Hunt. She said credit unions support the intent of the law, but, "In terms of its intent, we want to ensure that it gets carried out effectively. We don't want a situation where it actually deters credit. Credit unions want to help their members." There are also issues of how notification of the financial institutions will be handled with regard to reservists. It could parallel the Servicemembers Civil Relief Act notification rules or financial institutions might be provided with lists of active duty servicemembers. NCUA and the other financial regulators currently have a consulting role. Whether regulation to legislation or vice versa, Hunt said, keeping the lines of communication open between NAFCU's legislative and regulatory arms is crucial. Disasters: What's Next After Sept. 11, terrorist financing and money laundering leapt to the forefront of regulation and compliance for financial institutions. "I think part of the problem with credit unions and BSA was all of a sudden there was a push for BSA compliance, not just from NCUA's perspective but really a push from [the Financial Crimes Enforcement Network] and Treasury to make sure enforcement of BSA was being carried out appropriately," Hunt said. "Credit unions were seeking additional guidance and I think now that guidance was widely distributed and credit unions become familiar with the guidance, we'll have to see whether or not they get more comfortable." Late last year, NCUA changed the procedures for suspicious activity reporting with regard to credit union board notification. The initial proposal had credit unions providing their boards with all the SARs filed. However, NAFCU and others were concerned about instances where confidential SARs were filed on board members. "NCUA did address a lot of our members' concerns by clarifying that there could be a summary of information. It doesn't have to be an official SAR," she outlined. "There was a concern on the credit unions' part as to the burden that was required. Also, what should credit unions do in a situation where a board member was the subject of the SAR." NAFCU also held a Webcast with NCUA Attorney Linda Dent, former NAFCU director of compliance, to aid member understanding. After 9/11, the Bank Secrecy Act reached new levels of importance, as did preparedness and business continuity, which were only punctuated by Hurricanes Katrina and Rita. And bird flu could be next. "Credit unions are expected to look at that as part of their normal disaster preparedness," Hunt said. NAFCU Associate Director of Regulatory Affairs Pamela Yu, who has been with the organization about two years, said just because you do not see it much in the media of late, does not mean it's not there. "I think credit unions are still very focused on preparedness," she said. "We might not be hearing quite as much...Credit unions are still working very hard on that." Carryover Hunt worked hard garnering NAFCU members' sentiment about NCUA's oversight of credit union conversions to mutual savings banks and effectively expressing that opinion to NCUA. "I've worked on that a long time and it poses some very difficult questions," she said. Philosophical questions, transparency, voter participation, just to name a few. Additionally, rumors are circulating regarding a possible legal challenge to NCUA's new rules on consumer disclosures in conversions. "NCUA has been criticized for its role on conversions," she observed. She said she has not specifically heard of legal challenges to the new rule, but the attorney pointed out that it would be easier to challenge "as applied." "Not that I want that," she followed up. Hunt added that NAFCU would still like to see some tweaking to the member communication aspect of the reg. NCUA's Member Services Assessment Pilot and the Government Accountability Office's related report on credit union member service are also key issues that could impact regulatory matters into the future. One of the staff advisories to the board from the MSAP was to consider continued data collection for all credit unions in the future. NCUA Board Member Gigi Hyland recently announced the appointment of members to the Outreach Task Force to assess the agencies outreach programs. In the GAO report, but not NCUA's, was a recommendation to add two new NCUA Board members. NAFCU argued against this due to a more than $1 million price tag to be borne by federal credit unions if it were to become reality, which Hunt said would be "too hard to speculate right now." Additionally, she said, "Of course, anytime you have more board members, you have more opinions. I'm not saying we wouldn't welcome that; it would just be different." She said NAFCU has enjoyed working with the current board, which has produced a lot of rules in the last year. Another carryover is the Fed's Reg Z open-end credit rules, which fall into Yu's portfolio of issues. "We've been working hard to address some of our members' concerns about disclosures, consumer disclosures, making sure that they're effective, making sure that they're not overly complicated," Yu said. In addition this year, the Fed is looking to incorporate the new bankruptcy provisions regarding consumer disclosures into its proposed rule after two previous advance notices. She said NAFCU is hoping the Fed will do some consumer testing with the disclosures. Yu expects a proposal will likely be forthcoming in the second quarter of the year. As NAFCU was founded on the principle of federal deposit insurance, private primary deposit insurance has been a recurring issue for the group. Hunt said the group was pleased that the regulatory relief legislation cleared the way for the Federal Trade Commission, with enforcement authority at the state level, to issue its consumer disclosure rules. "We believe that federal insurance is the best option for credit unions," Hunt explained, adding that having proper disclosures is crucial to consumer awareness. But with this matter resolved, the private primary deposit insurance issue is not going away after Texas recently began allowing state chartered credit unions there to use private primary deposit insurance and Washington State is studying it. As more states begin to look at the private insurance option, Hunt said of the moves, "Regulatory burden is never helpful...Consistently, over the past several years, there tends to be more and more regulation and there's not a whole lot falling off the books." While some NCUA regs apply to state charters, there are others, like capital requirements and business lending caps, where states can be less restrictive. Yu added, "I think too, credit unions have a lot more enforcement responsibilities." She pointed to Internet gambling enforcement, which is awaiting regulation. While it appears enforcement will probably fall to the payment systems, there are policy implications and it all builds toward a cumulative effect. When asked specifically of its support for the dual chartering system, Hunt said, "We believe that we have a healthy financial system in this country and hopefully that will continue." Examination policies are crucial to maintaining a healthy system. Last year, NCUA issued a letter to credit unions that included guidance to examiners stating that the 1% return on assets was a guide and not set in stone in order for a credit union to achieve a CAMEL 1 rating. "We don't necessarily know that eliminating the matrix is going to be the best solution. Credit unions need flexibility but they also need to have a general framework of what examiners are looking for," Hunt said. NAFCU continues to monitor any amendments the agency is exploring. However, there are other instances where regulatory agencies have been--at least in practice--giving guidance documents the weight of regulation. "One thing that we have noticed is more of a push from agencies for guidance documents...We think that they are more flexible but when they are given the weight of regulation, we want to make sure that credit unions are given the opportunity to comment appropriately on the guidance documents," she concluded. --firstname.lastname@example.org