1. Regulatory/Legislative Update OH CU Industry Day August 29, 2016

2. © 2015 NASCUS. All rights reserved. About NASCUS The Voice for the State Credit Union System  Founded in 1965  Defends the State System and State Autonomy  Advocates for Smart Effective Regulation  Focused on Ensuring Viability of State System  Membership = State Regulators, Credit Unions, Leagues, Consultants and CUSOs

3. © 2015 NASCUS. All rights reserved. DISCLAIMER The information contained in this presentation does NOT represent legal advice. It in no way is intended to represent a formal determination made by any regulatory agency on any specific matter. Issues at your credit union are fact specific and you should seek legal counsel or formal supervisory determination to guide any course of action.

4. By the Numbers  6,385 FICUs  2528 SCUs (2303/225)  100 million members  $1.18 trillion in assets  Average credit union size = $171.6 million  3 Liquidated (2 FCU/1 SCU)  2 in Conservatorship (SCUs)  1 Merged w/assistance (SCU)  74 Voluntarily merged CUs (thru 4/30/2016) 16 FCU into SCU, 22 SCU into SCU, 5 SCU into FCU  2 FCU to SCU conversions © 2015 NASCUS. All rights reserved.

5. NASCUS Initiatives Consolidating Part 741 Interstate Branching Expanding NCUA Board © 2009 NASCUS. All rights reserved.

6. Recent CFPB Activities Arbitration proposal Payday/auto title proposal TILA/RESPA Disclosure proposal TILA/RESPA Mortgage Servicing final rule Debt Collection “Outline of Proposals” Anticipated: Prepaid and Overdraft proposals © 2009 NASCUS. All rights reserved.

7. Arbitration Bureau issued proposed rule in May 2016. NASCUS summary available on site. Comments were due to Bureau by August 22, 2016. Proposal would prohibit covered providers of certain consumer financial products from using pre-dispute arbitration agreements to prohibit a consumer from participating in a class action. Proposal would require covered providers involved in arbitration to submit certain arbitration records to Bureau. © 2009 NASCUS. All rights reserved.

8. Payday/Auto Title Bureau issued a NPRM in June 2016. Comments are due to the Bureau by September 14, 2016. Bureau issued a Fact Sheet on its Payday proposal. NASCUS summary of the Fact Sheet is available on site. Proposal would cover two categories of loans: (i) loans with a term of 45 days or less and (ii) loans with a term greater than 45 days, provided the loans have an all-in annual percentage rate greater than 36 percent and either are repaid directly from the consumer’s account/income or are secured by the consumer’s vehicle. © 2009 NASCUS. All rights reserved.

9. Payday/Auto Title Ability to Repay: would require lenders to determine consumer has ability to repay loan and limits lenders’ ability to refinance existing debt Would provide an exception to the ability to repay requirement for short-term loans, up to $500 - (PALS) Would limit payment collection attempts (account debit) to twice before addt’l consent required © 2009 NASCUS. All rights reserved.

10. TILA/RESPA Proposal (Disclosure) Bureau issued proposal that amends the final TILA/RESPA rule (effective October 2015). Comments are due to the Bureau by October 18, 2016. Proposal incorporates previously issued guidance and provides added clarity re: the rule. © 2009 NASCUS. All rights reserved.

11. TILA/RESPA Disclosures Includes a tolerance for the “total of payment” calculation; parallels existing tolerances for the finance charge and related disclosures. Clarifies recording fees/transfer taxes can be charged in connection with housing assistance lending; partial exemption would not be lost. Amends TILA/RESPA rule to cover cooperative units; regardless of state designation of “real property.” © 2009 NASCUS. All rights reserved.

12. Mortgage Servicing Final Rule Final rule amends 2013 Mortgage Servicing Rules (Regulation Z and Regulation X); related proposal was issued in November 2014. Most provisions go into effect 12 months after publication in Fed. Reg.; provisions re: “successors in interest” and periodic statements for consumers in bankruptcy become effective 18 months after publication in Fed. Reg. © 2009 NASCUS. All rights reserved.

13. Mortgage Servicing Final Rule Servicers required to provide certain loss mitigation/foreclosure protections more than once over life of loan. Requires additional protections for consumers whose mortgages have been transferred to another servicer. Requires written notification to consumer when loss mitigation application is complete. © 2009 NASCUS. All rights reserved.

14. Debt Collection – “Outline of Proposals” Bureau issued outline of proposals under consideration re: debt collection. Proposal would focus on third party debt collectors (FDCPA). However, Bureau does intend to look at consumer protection issues related to first party debt collectors (credit unions) in the near future. Good idea to take a look at outline to see Bureau’s focus. © 2009 NASCUS. All rights reserved.

15. Debt Collection – “Outline of Proposals” Debt Substantiation – debt collectors would be expected to verify that debt is correct and debtor is correct. Limited Communications – would limit “excessive” or disruptive” communication with debtors (inconvenient times, inconvenient places) More detail – collectors would be required to provide more specific information about the debt; provide consumer info about federal rights re: debt collection in initial notices. © 2009 NASCUS. All rights reserved.

16. Debt Collection – “Outline of Proposals” Disputed Debt – would require collector to cease collection activity until debt has been verified. © 2009 NASCUS. All rights reserved.

17. Outstanding Items Prepaid final rule, expected sometime this summer. Related proposal was issued in 2014. Anticipated prepaid final rule will: (i) bring prepaid accounts under Reg E and (ii) amend Reg E and Reg Z to regulate prepaid accounts with overdraft and credit features. © 2009 NASCUS. All rights reserved.

18. Outstanding Items Overdraft: Bureau engaged in pre-rulemaking activities (consumer surveying) to determine if rulemaking is appropriate. Bureau has expressed concerns re: –Consumer “opt in” consent –Overdraft coverage limits –Transaction Posting Order –Overdraft/Insufficient Fee Structures –Related involuntary account closures © 2009 NASCUS. All rights reserved.

19. FinCEN: Beneficial Owner (CDD) FinCEN issued final rule re: CDD for beneficial owners. Rule became effective July 11, 2016; compliance date is May 11, 2018. Rule requires institutions to identify and verify the beneficial owners of legal entity customers at account opening. Identification procedures are similar to those required under the CIP; CU may rely on beneficial ownership info supplied by entities unless knowledge of facts that information may not be reliable. © 2009 NASCUS. All rights reserved.

20. FinCEN: Beneficial Owner (CDD) Beneficial owners determined based on two prongs: control or ownership. Ownership Prong: each individual, if any, who directly or indirectly (through contract, arrangement, understanding, relationship or otherwise) owns 25 % or more of the equity interests of a legal entity customer. Control Prong: a single individual with significant responsibility to control, manage or direct legal entity customer. © 2009 NASCUS. All rights reserved.

21. NCUA/Other Update Incentive-Based Compensation MBL/Commercial Lending NCUA Rule Review CAMELS © 2009 NASCUS. All rights reserved.

22. Incentive Based Compensation Proposal Required by § 956 of Dodd Frank Proposal issued in May 2016. Comments were due on July 22, 2016. Applies to banks & credit unions with assets of $1 billion or greater CU may not provide incentive based compensation that encourages inappropriate risk taking. © 2009 NASCUS. All rights reserved.

23. Incentive Based Compensation Would apply to all federally insured/privately insured credit unions applying for federal insurance with assets of $1 billion or more. Would apply to senior executives, employees or significant risk takers (credit unions over $50 billion only) who receive incentive based compensation. Rule divides covered entities (including credit unions) into three categories: Level 1 (greater than or equal to $250 billion in assets) © 2009 NASCUS. All rights reserved.

24. Incentive Based Compensation Level 2 (greater than or equal to $50 billion and less than $250 billion in assets) Level 3 (greater than or equal to $1 billion and less than $50 billion in assets) Note: NCUA states that 96% of federally insured credit unions are excluded from rule; most of the credit unions covered fall into the Level 3 category. © 2009 NASCUS. All rights reserved.

25. Incentive Based Compensation For the most part, proposal applies to Level 1 and Level 2 entities. Most credit unions (Level 3) would only be subject to basic recordkeeping requirements re: their incentive compensation agreements. However, NCUA has reserved the authority to require certain Level 3 credit unions to comply with provisions intended for Level 1 and 2 entities. © 2009 NASCUS. All rights reserved.

26. Incentive Based Compensation Incentive based compensation arrangements must balance financial and non-financial considerations such as compliance, member satisfaction, risk profile Incentive based compensation is adjusted to account for actual losses or executive risk profile Credit union board oversight of incentive based compensation programs—includes approving amounts, timing, exceptions/adjustments. Annual record keeping requirements (participants, copies of plan and analysis of compatibility with risk management) © 2009 NASCUS. All rights reserved.

27. MBL/Commercial Lending Final Rule Final rule substantially similar to 2015 MBL proposal. Rule becomes effective Jan. 1, 2017 and the personal guarantee waiver on commercial loans was no longer required after May 13, 2016. Final rule moved from “prescriptive” to “principals” based approach that focuses on safety and soundness. Credit unions are expected to maintain prudent risk management processes/sufficient capital commensurate with their commercial lending practices. © 2009 NASCUS. All rights reserved.

28. MBL/Commercial Lending Final Rule Final rule eliminates most of the current rule’s prescriptive requirements such as collateral/security requirements, equity requirements and loan limits. Credit unions are allowed to tailor their MBL program to fit their strategic goals and members’ needs. Final rule provides for a partial rule exemption for small credit unions that meet certain conditions: (i) with assets less than $250 M and (ii) total commercial loans less than 15% of CU’s net worth. Small CU exemption applies to Sections 723.3 and 723.4 of the MBL rule. © 2009 NASCUS. All rights reserved.

29. MBL/Commercial Lending Final Rule Board Requirements: –Must approve loan policy annually, when there is a material change or when otherwise warranted. For example, changes to: Types of loans Loan concentration Collateral requirements Underwriting requirements Credit risk rating system © 2009 NASCUS. All rights reserved.

30. MBL/Commercial Lending Final Rule Board Requirements –Ensure proper staffing. Staff experience should be commensurate with lending program. –Board should receive periodic briefings on commercial lending program, related risks & earnings/net worth impact. © 2009 NASCUS. All rights reserved.

31. MBL/Commercial Lending Final Rule Personal Guarantee (723.5) Effective May 13, 2016, a FICU is no longer required to obtain a personal guarantee from principal(s) of the borrower. Credit union is no longer required to seek a waiver of the personal guarantee requirement but would be required to document in the loan file the mitigating factors that offset the risks related to the business loan. Staff Experience (723.3) Requires a FICU to employ qualified staff with experience in (i) underwriting and processing for the type(s) of commercial lending the FICU is engaged in; (ii) overseeing and evaluating the performance of a commercial loan portfolio (including rating/quantifying risk through a credit risk rating system); and (iii) conducting collection/loss mitigation activities for the type(s) of commercial lending in which the FICU is engaged. © 2009 NASCUS. All rights reserved.

32. NCUA Rule Review NCUA reviews ½ of its rules each year. This year’s review included Part 741, which references NCUA’s rules applicable to FISCUs. Comments were due on 8/8 and NASCUS filed comments. NASCUS comment focused on three areas: clarification, consolidation and appeals process. © 2009 NASCUS. All rights reserved.

33. NCUA Rule Review Clarification – clarity needed with regard to several NCUA that are not clear as to what applies to FISCUs. Ex: § 715 Supervisory Committee Audits, not clear how much of the rule applies to FISCUs. Consolidation – urged NCUA to consolidate all FISCU rules into a single section. Appeals – urged NCUA to create a more transparent appeals process that provides annual reports re: the number of appeals filed, general description of nature of appeals and disposition. © 2009 NASCUS. All rights reserved.

34. NCUA move to “CAMELS” NCUA is migrating to “CAMELS.” May be a few years down the road. NCUA intends to issue a proposal for comment. The current CAMEL rating system combines supervisory evaluation of liquidity and Interest Rate Risk (IRR). May not be the best method of evaluating IRR. Adding the “S” or “Sensitivity to Market Risk” provides more clarity, accuracy and transparency with regard to how IRR is assessed. 16 states and the federal banking agencies already use “CAMELS.” © 2009 NASCUS. All rights reserved.

35. Legislative Update A few bills we are watching now… HR 4538: Introduced in Feb. 2016; Reporting of senior financial abuse. Provides “covered financial institutions” (including credit unions) with protection from liability related to such reporting. Passed House on July 5, 2016. No additional action taken. HR 5419: Introduced in June 2016. Credit union exam reform; would amend Federal Credit Union Act to change NCUA exam cycle to 18 months. No recent action taken. © 2009 NASCUS. All rights reserved.

36. Legislative Update HR 5869: Introduced in the House in July 2016. Would amend the Federal Credit Union Act to require the NCUA Board to include a report with its annual budget providing a detailed analysis of the agency’s expenses and how those expenses are assigned (prudential activities or insurance- related activities). Would require rationale for any fees taken from the share insurance fund. Report would need to be public. Referred to the House Financial Services Committee in July also. No further action. © 2009 NASCUS. All rights reserved.

37. Contact Info Nichole Seabron Email: nseabron@nascus.orgnseabron@nascus.org Direct dial: 703.528.0669 Follow NASCUS on Twitter! @TheNASCUS On the World Wide Web: NASCUS.org © 2015 NASCUS. All rights reserved.

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