It’s never easy to overhaul a time-honored practice, even if that convention might be flawed and the solution promises to reduce paperwork for all parties involved.
Case in point: The Consumer Financial Protection Bureau’s pending Integrated Disclosure Rule — a.k.a. “Know Before You Owe — which has caused much consternation in credit union circles.
The rule, mandated by the Dodd-Frank Act but a long time in the making, requires credit unions to merge documents required under the Truth-in-Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA).
The integrated disclosure rule isn’t the only new rule credit unions must adapt to this year, but it’s the only significant federal regulation slated to go into effect in 2015 — and as such it has drawn intense scrutiny. Fortunately, credit unions learned in mid-June they’ll likely have two additional months to prepare, as CFPB announced it will introduce an amendment to delay the effective date to Oct. 3, 2015.
CFPB initially issued the rule in November 2013 with an effective date of Aug. 1, 2015. After adamantly sticking to that date for several months amid protests from credit unions and their trade lobbies, the CFPB announced in early June it would recognize “good-faith efforts” by credit unions to comply with the regulation.
And in the middle of the month, CFPB announced it would delay the effective date by two months, citing an administrative error that prevented the rule from meeting the requirements of the federal law.
So from a credit union perspective, what’s all the fuss about? The inevitable complications that stem from revamping paperwork under a new rule, and inevitable confusion that will stem from a quick pivot from old forms to new forms, as mandated by the rule.
The integrated disclosure rule requires the use of a three-page “Loan Estimate,” which replaces the Good Faith Estimate and the initial Truth in Lending disclosure, and the five-page “Closing Disclosure,” which replaces the HUD-1 (or 1A) and final Truth in Lending disclosure.
The rule applies to most closed-end consumer mortgages. Exceptions include home equity lines of credit, reverse mortgages, and loans made by a creditor that makes five or fewer mortgages in a year. Those categories must continue to use the old forms.
The trick in terms of timing is that credit unions must use the old forms for any loan applications received on or before July 31 (which now likely will be Sept. 30), even if the loan is processed after the effective date. So credit unions must operate separate processing systems until they clear the backlog of pre-effective date loan applications.
The integrated disclosure rule’s impact carries deep into the weeds — causing changes in escrow notices, escrow cancellation notices, and mortgage transfer disclosures, and requiring distribution of an information booklet to consumers applying for a federally related mortgage.
In sum, credit unions aren’t simply updating forms–they’re changing their loan department processes. And they must ensure their vendors comply with the integrated disclosure rule, too.
Credit unions should also be aware of these four new or relatively new regulations and interpretations:
** NCUA’s liquidity rule, which became effective March 2014. All credit unions must have a liquidity plan in place, and all credit unions with assets of $250 million or more must establish and document access to the Federal Reserve’s discount window or the Central Liquidity Facility. A credit union can use both channels, if it so desires. If your credit union has more than $250 million in assets, you must periodically test to ensure availability of funds.
** IRS rollover rule change for IRAs. People are now limited to one rollover of one account in a 12-month span, whereas for more than three decades they could roll over each account they own once in a 12-month span. Credit unions don’t bear any legal responsibility for ensuring their members follow this rule. But they should take it upon themselves to alert members to the new rule, because it’s a drastic change from common practice and, unlike some other missteps, can’t be fixed retroactively. Any distributions beyond the one allowed under the rule must be treated as taxable income, which can be an enormous hit–regardless of the member’s tax bracket. Members look to credit unions for sound financial advice and you can reinforce that trust. Inform them of an important loophole: They can continue to make unlimited trustee-to-trustee transfers, from one IRA directly to another IRA.
** Underwater mortgage relief. In December 2014, NCUA changed this rule to encourage federally insured credit unions to modify or refinance real estate loans they hold in areas where home prices have declined. Credit unions now can modify or refinance a real estate loan without a new appraisal if no new monies are advanced, or if a new advance carries adequate collateral protection.
** Online privacy notice. Credit unions now can post their privacy notices online, instead of mailing them. However, this rule, effective in October 2014, requires credit unions to meet certain eligibility standards. Their privacy information can’t have changed since delivery of most recent paper notice. They must adhere to the model privacy form. They must allow consumers to review the privacy notice without logging in to their online banking account. And they must inform members of the online availability of privacy notice annually, through billing statements or separate communications.
Also, one important potential regulation credit unions must continue to monitor is NCUA’s revised risk-based capital plan (RBC2). Some doubt whether a final rule will be issued this year, and the fate of the proposal has been further clouded by legislation introduced into the House of Representatives that would delay its implementation by at least 13 months while legislators study its potential impact.
Trade associations significantly dampened the impact of RBC2 compared with its predecessor, but still question the need for, cost of, and legality of, the legislation.