Credit unions should be aware of the statutory changes made by the Economic Growth, Regulatory Relief, and Consumer Protection, which became effective on May 24. Among these are three major changes in the areas of member business lending, appraisals, and the Home Mortgage Disclosure Act.
Changes Related to the Member Business Loan Definition
1. How does this law (S. 2155) change the definition of member business loans for purposes of the statutory limit on member business loans?
Section 105 of the act amended the statutory member business loan limit to exempt all loans secured by a 1- to 4-family dwelling (residential property) from the definition of a member business loan. Previously, only loans secured by a 1- to 4-family dwelling that is the member’s primary residence were excluded. This change was reflected in the NCUA’s Rules and Regulations through a notation vote on May 30, 2018.
2. How will the member business loans definition change be reflected on the Call Report?
The NCUA updated the Call Report Instructions for the June 30, 2018, cycle. Credit unions will only report loans that meet the revised definition of a member business loan in account 400A (see page 77 of the Call Report Instructions). Therefore, credit unions should no longer report any loans secured by a 1- to 4-family residential property in account 400A. Credit unions should continue to report all loans secured by residential property in Section 2 of Schedule A. There will also be one related change to a Call Report field scheduled to take effect with the September 30, 2018, Call Report cycle.
Additionally, the NCUA is amending the Call Report instructions related to how non-member business loans are reported for purposes of calculating a credit union’s risk-based net worth requirement. These changes are reflected in the Call Report Instructions for Account 400 (see pages 78 and 79 of the Call Report Instructions).
3. What are the changes to a credit union’s risk-based net worth requirement?
All “long-term real estate loans” that are secured by a 1- to 4-family residential property are now included in the “long-term real estate loans” risk portfolio for purposes of calculating a credit union’s risk-based net worth ratio. Loans secured by a 1- to 4-family residential property that will contractually refinance, reprice, or mature within the next five years are included in the “average-risk assets” risk portfolio for purposes of calculating a credit union’s risk-based net worth ratio.
Additionally, non-member business loans are no longer included in the “member business loans outstanding” risk portfolio for purposes of calculating a credit union’s risk-based net worth ratio. Non-member business loans are now included in the risk-based net worth risk portfolio, based on the type of loan and underlying collateral. For example, a business loan to a non-member, secured by real estate, is included in the long-term real estate loans risk portfolio or the average-risk assets risk portfolio.
Depending on a credit union’s concentration of long-term real estate loans and member business loans, these changes could result in loans secured by a 1- to 4-family residential property and business loans to non-members being assigned a risk weight that is higher, lower, or the same as when they were previously defined as member business loans.
4. Does the change to the member business loan definition for loans secured by 1- to 4-family residential property alter the NCUA’s expectations for managing risk for these loan types?
No. As with all loans, a credit union’s risk assessment and management should be appropriate for the type of loan and the specific risks associated with the borrowing arrangement. The repayment source should always be identified and evaluated for sufficiency and reliability. Loans secured by a 1- to 4-family residential property that is not owner-occupied have some risk characteristics that are similar to commercial real estate loans. Credit unions should have credit risk-management policies and processes suitable for the risks specific to this type of lending.
Changes Related to Appraisals
1. How does S. 2155 change appraisal requirements?
The new law provides, in Section 103, an exemption to the appraisal requirements for certain transactions with values of less than $400,000 involving real property or an interest in real property that is located in a rural area. This exemption was effective upon the law’s enactment.
2. When will the change for the rural area appraisal requirement go into effect?
Credit unions may begin applying this exemption immediately. The NCUA is in the process of updating Part 722 of its Rules and Regulations and corresponding examiner guidance to reflect this change.
Changes Related to the Home Mortgage Disclosure Act (HMDA)
1. How does S. 2155 change HMDA requirements?
S. 2155 provides partial exemptions for some insured credit unions from certain HMDA requirements. The partial exemptions that are generally available for:
- Closed-end mortgage loans, if the credit union originated fewer than 500 closed-end mortgage loans in each of the two preceding calendar years.
- Open-end lines of credit, if the credit union originated fewer than 500 open-end lines of credit in each of the two preceding calendar years.
For closed-end mortgage loans or open-end lines of credit subject to the partial exemptions, the act states that the “requirements of [HMDA section 304(b)(5) and (6)]” shall not apply.” Accordingly, for these transactions, those institutions are exempt from the collection, recording, and reporting requirements for some, but not all, of the data points specified currently in Regulation C.
The Bureau of Consumer Financial Protection expects later this summer to provide further guidance on the applicability of S. 2155 to HMDA data collected in 2018.
For all credit unions filing HMDA data collected in 2018, the Act will not affect the format of the Loan/Application Registers (LARs). LARs will be formatted according to the previously released Filing Instructions Guide for HMDA Data Collected in 2018. If a credit union does not report information for a certain data field due to the Act’s partial exemptions, the credit union will enter an exemption code for the field specified in a revised filing guide that the Bureau expects to release later this summer.
2. What changes will the NCUA make as a result of this statutory change?
In May, the NCUA sent a notice to all field staff notifying them of the change and instructing them to use the amended thresholds when reviewing HMDA compliance. The agency is in the process of updating examiner guidance and examination tools for reviewing HMDA compliance.
Other Changes Applicable to Credit Unions
1. What other S. 2155 provisions affect credit unions?
In addition to those listed earlier in this article, S. 2155 included a number of amendments that are applicable to credit unions. Credit unions should refer to the specific regulations and applicable changes outlined in S. 2155 to ensure ongoing compliance. The NCUA will review compliance with these changes as part of the risk-focused examination program, as warranted. Specifically, S. 2155 includes amendments related to:
- Safe harbor provisions for qualified residential mortgages held in the portfolio of the institution;
- Closing disclosure requirements under the Truth in Lending Act-Real Estate Settlement Procedures Act Integrated Disclosure Rule;
- Escrow requirement exemptions under the Truth in Lending Act;
- Protections related to private student loans;
- Lender requirements for refinanced Veterans Affairs loans;
- The Service Members Civil Relief Act foreclosure relief timeframe for military members;
- The use of personal information from a driver’s license or personal identification card when a consumer seeks to open a new account or obtain a financial product or service through any internet-based source, such as a website or mobile application;
- Protection for certain employees and their affiliated credit unions for disclosure of suspected financial exploitation of a senior citizen (age 65 or older) to a regulatory or law enforcement agency, if certain circumstances are met; and
- Disclosure requirements, under the Expedited Funds Availability Act, at ATMs in the U.S. territories of American Samoa, the Commonwealth of the Northern Mariana Islands, and Guam.
The NCUA will update examiner guidance and examination procedures as necessary to reflect these changes. Additionally, the NCUA will continue to work cooperatively with state supervisory authorities and the other federal regulators as these changes are implemented.