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Wipfli analysis of NCUA guidance for credit unions for COVID-19 fallout

Mar 26, 2020

The coronavirus pandemic has already left thousands of Americans without jobs. As people face difficult financial situations, many borrowers will become delinquent on their debt obligations.

Credit Unions will have an important role in addressing these situations. In NCUA’s Letter to Credit Unions 20-CU-02, the NCUA encouraged credit unions to work with affected members and provided a list of potential options, such as fee waivers, easing restrictions, and various loan payment accommodations.

As credit unions implement and consider implementing new measures to work with their members, we have compiled a list to help management and compliance staff evaluate these measures from a regulatory standpoint. We recommend that management consult with their Wipfli advisor for further clarifications.

NCUA   Wipfli analysis
 1.Waiving automated teller machine (ATM) fees Regulation E would not require any notification of a waiver of fees. If this was done informally with no real change in the credit union’s fee schedule, then no notification would be required when the fee is reinstated after the duration of the waiver. As a business matter, a notification to members of this voluntary waiver would allow members to be aware of and benefit from the change. Although it does not appear to be required, it would be a matter of member service to provide notification when the fee is reinstated.

However, if the change was made contractual and binding, through for example, a change-in-terms notice, a notification of the subsequent reinstatement of the fee would be required 21 days before the fees could be imposed.

Alternatively, credit unions could make this a contractual change in terms with a finite termination date by sending out a change-in-terms notice describing the temporary fee waiver and the date it will expire.

Waiving for non-members would require no notification but would require the removal of the ATM on screen fee notification and acceptance.
 2. Increasing ATM daily cash withdrawal limits Regulation E would not require any notification of the increase. If this was done informally with no real change in the credit union’s disclosures, then no notification would be required when the limit was decreased after the duration of the change. As a business matter, a notification to members of this voluntary increase would allow members to be aware of and benefit from the change. Although not specifically required, it would be a matter of member service to provide notification when the limits are subsequently reduced.

If the change was made contractual and binding, the notification of the decrease would be required 21 days before the lower limit could be re-imposed.

Alternatively, credit unions could make this a contractual change in terms with a finite termination date and send out the disclosure describing the temporary increase and the date it will expire.
 3. Waiving overdraft fees Regulation DD would not require any notification of a waiver of fees. If this was done informally with no real change in the credit union’s fee schedule, then no notification would be required when the fee was reinstated after the duration of the waiver. As a business matter, a notification to members of this voluntary waiver would allow members to be aware of and benefit from the change. Although not specifically required, it would be a matter of member service to provide notification when the fee is reinstated.

If the change was made contractual and binding, through, for example, a change-in-terms notice, a notification of the subsequent reinstatement would be required 30 days before the fees could be reinstated.

Alternatively, credit unions could make this a contractual change in terms with a finite termination date, by sending out a change-in-terms notice describing the temporary fee waiver and the date it will expire.
 4. Early withdrawal penalties on time deposits Regulation DD would not require any notification of a waiver or reduction of the early withdrawal penalty. If this was done informally with no real change in the credit union’s fee schedule, then no notification would be required when the penalty was reinstated after the duration of the waiver. As a business matter, a notification to members of this voluntary waiver would allow members to be aware of and benefit from the change. Although not specifically required, it would be a matter of member service to provide notification when the fee is reinstated.

If the change was made contractual and binding, a notification of the reinstatement of the early withdrawal penalty would be required 30 days before the fees could be reinstated.

Alternatively, credit unions could make this a contractual change in terms with a finite termination date and send out the disclosure describing the temporary fee waiver and the date it will expire.

Compliance with Regulation D would minimally limit the withdrawals to one every 7 days. If a member needed to make a withdrawal within 7 days of the previous withdrawal the credit union would need to refuse to honor the withdrawal or impose a penalty of at least seven days’ simple interest on amounts withdrawn within the first six days after deposit (and on amounts withdrawn within 6 days after a partial withdrawal).

Changing time deposits to transaction deposits to benefit from the temporarily eliminated reserve requirements does not seem a viable alternative.
 5. Waiving availability restrictions on insurance checks There would be no related consumer regulatory provisions here unless the credit union would make funds available sooner than stated in the funds availability policy regarding holding other funds in a transaction account against cashed checks. In this case, Regulation CC would require a notice within 30 days after making this change.
 6. Easing restrictions on cashing out-of-state and non-member checks Cashing of non-member checks for members - There would be no related consumer regulatory provisions here unless the credit union would make funds available sooner than stated in the funds availability policy regarding holding other funds in a transaction account against cashed checks. In this case, Regulation CC would require a notice within 30 days after making this change.

Cashing checks for non-members - If the credit union did not currently allow cashing of checks for non-member checks per the Bank Secrecy Act policy, a Board resolution to approve the temporary change is required, and OFAC procedures should also be addressed.

There would appear to be no regulatory compliance issues related to cashing out-of-state checks.
 7. Easing credit terms for new loans for members who qualify If easing terms of the Board of Director approved policy, such as loan terms or debt ratio, should obtain approval by the Board if easing the terms.

For consumer residential real estate loans secured by a dwelling the Credit Union should still take into consideration underwriting requirements in the ATR/QM rules and those outlined under part 701 of NCUA’s regulations based off your asset size.

For credit cards, a reasonable decision that the borrower’s payment ability can meet the required minimum periodic payment as defined in CARD act should be determined.

If the Credit Union decides to offer new credit card loans with a reduced rate during the pandemic with an intention to increase the rate after a specified time, then the credit union would need to issue a 45 Day Change- in-Terms notice outlined in the CARD Act. As well as consider additional disclosures that would outline the credit union’s intention to increase the interest rate.

Credit Unions should be mindful of Fair lending and Unfair, Deceptive, & Abusive Acts Practices (UDAAP) when making policy exceptions.
 8. Offering or expanding payday alternative loan programs NCUA issued a new payday lending rule in September 2019 for federal credit unions, expanding the limit to $2,000, terms between 1-12 months, can be immediately upon membership and restricts the credit union to only one type of payday product. There is also a prohibition against rollovers and limits on the number of loans to one single member. For full list of terms, see https://www.ncua.gov/files/agenda-items/AG20190919Item4b.pdf.

Federal Credit Union Act also imposes a rate ceiling, which is currently set at 18%, rate is calculated inclusive of finance charges.

Keep in mind any concentration limits set by the Board of Directors.
 9. Increasing credit card limits for creditworthy borrowers Regulation Z allows credit card issuers to extend credit above the limits, as long as no charges are imposed, there is no additional disclosure required.

Credit limits themselves do not appear to be a disclosable item under Regulation Z but contractual changes would need to be compliant with state contract law.

Depending on the process used to make limit changes, other regulations may apply such as UDAAP or Fair lending. Changes should be communicated clearly, applied fairly to the member and not cause consumer harm.

If the line of credit is secured by improved real estate the increase of the limit would trigger the requirement for a current flood determination, and if the property is in a special flood hazard area additional disclosures would be required as well, and additional flood insurance may be needed.

If the line of credit is secured by the consumer’s principal residence, the increase in the credit line will trigger the right to rescind.
 10. Late payment fees on credit cards and other loans Regulation Z would not require any notification of a waiver of fees if this was done informally with no real change in the credit union’s fee schedule, and no notification would be required when the fee was reinstated after the duration of the waiver. As a business matter, a notification to members of this voluntary waiver would allow members to be aware of and benefit from the change. Although not specifically required, it would be a matter of member service to provide notification when the fee was reinstated.

If the change was made contractual and binding, the notification of the increase would be required 45 days before the fees could be reinstated, and possibly 45 days before the fee is waived.

Alternatively, credit unions could make this a contractual change in terms with a finite termination date and send out the disclosure describing the temporary fee waiver and the date it will expire.
 11. Offering payment accommodations, such as allowing borrowers to defer or skip some payments, or extending the payment due dates, which would avoid delinquencies and negative credit bureau reporting caused by any COVID-19-related disruptions Regulation Z does not require a change in terms notice if the skip payment arrangement is already included in the original terms of the agreement, if not a new agreement will be needed.

Skip-a-payment plans may have short term benefits, but may only truly benefit the borrower in cases when the unpaid interest is deferred to the end of the loan. If unpaid interest remains currently due, borrowers will need to make multiple payments of interest to reach a point where they begin paying down principal again. This can result in the term of the loan going out much further than the one or two skipped payments. Depending on the communication and the processing of the skipped payment, there may be a potential UDAAP risk.

If the loan happened to be secured by improved real estate, the extension/modification would trigger flood determination procedures, and potentially flood notification procedures if the improvements are located in a special flood hazard area.

 

Keep in mind that adverse action notices will be required in most circumstances when a member requests a modification or an increase in limits and you do not grant the request. 

Also, any changes contrary to written policy should be approved by the board of directors. The approval should include the starting and ending dates for the change.

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Author(s)

Tim Tedrick
Tim Tedrick, CRCM, CRP
Principal
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Alison Herrick
Alison J. Herrick, CPA
Partner
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