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Compliance: The Consumer Is King

Expect more scrutiny on fair lending and other consumer-focused issues.

March 11, 2012
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Credit unions can expect to face three major regulatory compliance issues this year, says Sai Huda, vice president/general manager for compliance solutions at FIS: safety and soundness, fair lending, and Unfair Deceptive Abusive Acts and Practices (UDAAP).

Safety and soundness refers to a renewed focus by NCUA and state regulatory agencies on management and board competency, Huda says. “The number of problem credit unions is rising. By the end of 2010, 359 credit unions had CAMEL [capital adequacy, asset quality, management, earnings, and asset/liability management] ratings of 4 or 5, and a larger number was expected by the end of 2011.”

At that time, another 1,791 federally insured credit unions had CAMEL ratings of 3, “meaning they had problems that could place their operations in eventual danger.

“The Office of Inspector General has said NCUA... didn’t do enough to force some credit unions to take corrective measures,” Huda continues. “One effect of NCUA’s new scrutiny has been that if a credit union enters a new business line and has no solid risk management plan for the new venture, NCUA will no longer give the institution a CAMEL 1 or 2 rating.”

As a result, Huda says credit unions must improve their performance. “NCUA Regulation 701.4 requires boards to get enhanced training. They need to understand asset/liability management, economic influences on members and the financial industry, and risk management.”

The emphasis on fair lending is a spillover from the Dodd-Frank Wall Street Reform and Consumer Protection Act, regulators’ scrutiny of big banks’ anticonsumer practices, and the creation of the Consumer Financial Protection Bureau. As a result, NCUA’s Office of Consumer Protection is looking at fair lending in greater detail.

Huda says financial institutions can run afoul of fair lending regulations by:

  • Charging unmarried co-applicants—say two sisters or a cohabiting couple—two higher credit report fees and only one fee for married couples, creating unfair treatment based on marital status;
  • Using the presence of a fraud report request in an applicant’s credit report as a reason to reject an application;
  • Requiring a spouse’s signature when an applicant qualifies on his/her own; and
  • Having discretionary pricing that results in a portfolio of loans with higher rates and fees charged to minority, female, or elderly applicants without any explanation.

UDAPP aims to provide transparency for consumers. “UDAAP makes sure that ads aren’t bait-and-switch,” Huda says, “and that there are no unfair, deceptive, or abusive sales or service conditions. Financial institutions are under pressure to grow and show returns, which may increase the temptation to engage in questionable practices. Credit unions must make sure their fee structures and payment procedures are clear so members understand what they’ll pay and there are no practices that may be considered problematic.”

FIS, which has worked with thousands of financial institutions as well as regulators, provides clients with software and education to get staff and directors up to speed.

“We offer online or in-person educational sessions with credit union boards,” Huda says. “We teach them what regulatory red flags to look for, questions to ask, and issues to focus on. Credit unions often ask us to review their product compliance and regulatory compliance programs. We benchmark them against successful, well-managed programs so they can see how other credit unions manage this responsibility.”

Next: Managing the reg burden

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