March–April 2022 ALSO INSIDE 2022 Litigation Outlook Effective Programs to Serve Underserved Communities Start with Listening Credit Unions Turn To Technology To Enhance Services
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3 THE NAFCU JOURNAL March–April 2022 March–April 2022 • VOLUME 47, NUMBER 2 The NAFCU Journal (ISSN 1043-7789) is published bimonthly every other month. March–April 2022, Volume 47, Number 2. Published by the National Association of Federally-Insured Credit Unions, 3138 10th Street N., Arlington, VA 22201-2149. Periodicals Postage Paid at Arlington, VA, and at additional mailing offices. POSTMASTER: Send address changes to The NAFCU Journal, NAFCU, 3138 10th Street N., Arlington, VA 22201-2149. The opinions and ideas appearing in this magazine are not necessarily representative of policies of NAFCU. Manuscripts and advertisements are welcome, although NAFCU reserves the right to edit manuscripts and refuse advertisements. Contact publisher for advertising information and rates. Appearance of an advertisement does not imply endorsement or guarantee of the advertiser’s claims. For subscription or advertising information, call 800-336-4644 or 703-522-4770. Email: nafcu@nafcu.org; website: www.nafcu.org. ©2022 National Association of Federally-Insured Credit Unions, all rights reserved. The NAFCU Journal (ISSN 1043-7789) is published bimonthly every other month. March–April 2022, Volume 47, Number 2. Published by the National Asso iation of F derally-Insured Credit U ions, 3138 10th Street N., Arlington, VA 22201-2149. Periodicals Postage Paid at rlingt n, VA and at additional mailing offices. POSTMASTER: Send address changes to The NAFCU Journal, NAFCU, 3138 10th Street N., Arlington, VA 22201-2149. The opinions and ide s appearing in this magazine ar no necessarily repr s ntative of polici s of NAFCU. Manuscripts and advertisements are welcome, alth ugh NAFCU reserves he right to dit manuscripts and refus advertisements. Contact publisher for advertisi g inf rmation and rates. Appearance of an advertisement does ot i ply endorsement or guarantee of the advertiser’s cl ims. For s bscription or advertising information, c ll 800-336-4644 or 703-522-4770. Email: nafcu@nafcu.org; w bsite: www.nafcu.org. ©2022 National Association of Federally-Insured Credit Unions, all rights reserved. 20 12 FEATURES 12 Credit Unions Turn To Technology To Enhance Services 20 2022 Litigation Outlook Make Sure Fees Are Charged as Stated in Agreements 26 Effective Programs to Serve Underserved Communities Start with Listening COLUMNS 5 Conferences 6 From the Chair 8 Washington and Industry Briefs 10 The Bottom Line 32 Inside NAFCU Services 34 Management Insight 36 Executive Spotlight 38 Leadership Download 40 Compliance Central 42 From the President’s Desk 26
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5 THE NAFCU JOURNAL March–April 2022 DIRECTORS Thomas W. DeWitt, Chair State Farm FCU (Ill.) Gary A. Grinnell, Vice Chair Corning FCU (N.Y.) Brian T. Schools, Treasurer Chartway FCU (Va.) Karen Harbin, Secretary Commonwealth CU (Ky.) Melanie Kennedy Southwest Financial FCU (Texas) James A. Kenyon Whitefish CU (Mont.) Frank Mancini Connex CU (Conn.) Lonnie Nicholson EECU (Texas) Jan N. Roche State Department FCU (Va.) Lisa A. Schlehuber Elements Financial FCU (Ind.) Keith Sultemeier Kinecta FCU (Calif.) EXECUTIVE STAFF B. Dan Berger President/CEO Anthony Demangone Executive Vice President/COO Meghan Burris Vice President of Communications and Media Relations Greg Mesack Senior Vice President of Government Affairs Randy Salser President of NAFCU Services Corporation MAGAZINE STAFF Haley Crimmins Editor LLM Publications Editorial Services and Design ADVERTISING sales@nafcu.org www.nafcu.org/advertise National Association of Federally-Insured Credit Unions | Your Direct Connection to Federal Advocacy, Education & Compliance National Association of Federally-Insured Credit Unions | Your Direct Connection to Federal Advocacy, Education & Compliance National Association of Federally-Insured Credit Unions | Your Direct Connection to Federal Advocacy, Education & Compliance CONFERENCES 2022 Calendar of Events Spring 2022 Regulatory Compliance School March 14–18, in-person in Arlington, Va. Strategic Growth Conference March 21–23, in-person in Greenville, S.C. Board of Directors and Supervisory Committee Conference April 11–14, in-person in Nashville, Tenn. CEOs and Senior Executives Conference May 11–13, in-person in Key West, Fla. Summer 2022 Virtual Risk Management Seminar Aug. 16–18 Congressional Caucus Sept. 11–14, in-person in Washington, D.C. Fall 2022 CFO Summit Sept. 20–22, in-person in Annapolis, Md. Regulatory Compliance & BSA Seminar Sept. 27–29, in-person in Louisville, Ky. Management and Leadership Institute Oct. 17–21, in-person in Annapolis, Md. Lending Conference Nov. 8–10, in-person in Greenville, S.C For more information about NAFCU’s conferences, go to www.nafcu.org/conferences. Looking for more educational opportunities? NAFCU’s Online Training Center has been redesigned to give credit union professionals easier access to the association’s training programs and library of webinars. For information and the current schedule of upcoming webinars, visit www.nafcu.org/ onlinetraining. Topics and dates subject to change.
6 THE NAFCU JOURNAL March–April 2022 FROM THE CHAIR THE CREDIT UNION DIFFERENCE IS INTEGRAL TO COMMUNITIES By Tom DeWitt, NAFCU Board Chair In the last decade, social media has provided our society with its very own ups and downs. While the mere ability to connect with peers is an obvious positive, I think most of us would agree the negatives pile up. That doesn’t suggest a positive future, but it’s important to understand there’s a difference between being social and being a member of a community. Socializing is simply interacting with those around you, which includes the good, the bad and the ugly. What’s more, even when social groups share a common territory or culture, there’s little that binds them in a material way. By comparison, members of a community don’t just occupy the same space, they share a common ownership of the community. Even if community members don’t own land or physical resources, they still share an interest in the community’s success and future. Credit unions give everyone an opportunity to participate in society’s financial system and experience shared ownership in a community. However, predatory lenders, regulations and market forces beyond our control can make delivering on the credit union promise quite challenging at times. Credit unions make it work, and remarkably, they don’t stop there. When their communities need more, credit unions don’t hesitate to answer the call. In the last two years, we’ve not only seen COVID-19 disrupt our lives, but our country has also experienced civil unrest, natural disasters and unprecedented financial and emotional stress placed on specific employment groups. Credit unions have been there, unwavering, through it all. Take, for example, a wildfire that occurred at the end of 2021 near Boulder, Colo. that displaced thousands of residents. A quick Google search produces an impressive list of credit unions that raised funds, distributed resources and even matched donations up to six figures. Many Colorado credit unions smartly leveraged their resources to make a huge impact on the communities touched by devastation. Earlier in December, in Kentucky, deadly tornadoes destroyed homes and businesses. Many of those displaced were people of modest means, and, although many large credit unions stepped up to the plate, it’s the modestly sized credit unions that were most impressive. These are only two examples out of many that exist that detail the credit union difference at work. Just one person working for one responsive, caring credit union can make a huge impact to others in need … and, with hardly any social fanfare. Some days it seems like human compassion levels are low. And as we scroll on social media, it can be hard to find humanity at work. However, if you look further into what’s happening in communities, especially where credit unions are present, you’ll find people helping people. For more on NAFCU’s 2022 Advocacy Priorities, go to www.nafcu.org/priorities. Tom DeWitt is president and CEO of State Farm Federal Credit Union in Bloomington, IL.
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8 THE NAFCU JOURNAL March–April 2022 WASHINGTON AND INDUSTRY BRIEFS COMMUNICATING A CYBERATTACK TO ORGANIZATIONS According to the National Institute of Standards and Technology (NIST), a cyber- attack targets “an enterprise’s use of cyberspace for the purpose of disrupting, disabling, destroying, or maliciously controlling a computing environment/infrastructure; or destroying the integrity of the data or stealing controlled information.” Today, almost every piece of information can be digitized. While digitization of banking services has important benefits for both credit unions and their members, the resulting proliferation of digital data and systems provides hackers with no shortage of potential targets to damage and exploit. For credit unions and other financial institutions that handle individual consumer finances, this threat can cause major stressors around the safety and privacy of members. In the unfortunate event that a breach does occur, here are some effective ways to proactively communicate a cyberattack. How to communicate If an organization does find itself amid a cyberattack, NIST created a Computer Security Incident Handling Guide1 designed to help organizations communicate the incident professionally and efficiently. Some key insights from the report include: ■ Have an organizational plan in place To efficiently deal with a cyberattack, organizations need to have a formal, focused, and coordinated approach in response to the incident. This response plan will provide the roadmap for employees, creating stability rather than panic if the incident were to happen again. Organizations should have a plan that aligns with its mission, size, structure, and functions. ■ Simplify internal and external outreach procedures When communicating both internally and externally in a time of crisis, it can become chaotic with different modes of information flooding in all at once. In preparation for communicating a cyberattack, organizations should establish media communications procedures that comply with its internal culture, as well as its policies on media interaction and information disclosure. According to the guide, for discussing incidents both internally and externally, organizations find it beneficial to designate one person of contact (POC) and one backup contact to avoid information overload. Advocacy NAFCU has long advocated for legislation and regulations that will help credit unions prevent and remain educated on cyberattacks. The association has developed a white paper, “NAFCU’s Principles for a Federal Data Privacy Standard,” that outlines six data privacy principles for legislators to take note of as all aspects of organizations find themselves operating in an increasingly digital world. These principles emphasize the need for a comprehensive federal data privacy standard that protects consumers, harmonizes existing federal data privacy laws, and preempts state privacy laws. The association has written to legislators emphasizing these principles as tools to ensure credit unions and their members feel secure with their data. NAFCU remains committed to helping credit unions stay informed of data privacy initiatives in Congress and will continue to fight for consumer privacy as more information continues to be digitized. NAFCU has a complimentary, member-only online community exclusively for those responsible for cybersecurity & IT at NAFCU member credit unions. Learn more about the NAFCU Cybersecurity and IT Network at www.nafcu.org/it-network. 1. Paul Cichonski, Tom Millar, Tim Grance, and Karen Scarfone. “Computer Security Incident Handling Guide” (August 2012). National Institute of Standards and Technology Special Publication No. 800-61. https://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST. SP.800-61r2.pdf, accessed January 2022.
9 THE NAFCU JOURNAL March–April 2022 ORIGINATE BUY SELL www.LendKey.com/lend Participate in one-time or recurring loan sales Access a variety of asset classes with attractive yields Member acquisition and retention strategies Geographic diversification and risk mitigation Automated money movement from origination through servicing Manage Liquidity With Loan Participations LendKey has helped over 325 credit unions deploy capital and mitigate risk through their network lending programs. LendKey.com/NAFCU info@LendKey.com Benefits of a network lending program: @lendkey @company/lendkey-technologies
10 THE NAFCU JOURNAL March–April 2022 THE FED’S BIG DILEMMA By Curt Long THE BOTTOM LINE In 2000, former Bank of England Governor Mervyn King acknowledged what many had long suspected: central bankers aspire to be boring. Their aims are stability and predictability, their world rife with anxious deliberations over quarter-point interest rate adjustments. In such a staid profession, what happened over the final months of 2021 qualifies as dramatic pyrotechnics. As of September, the Federal Open Market Committee (FOMC) was still holding the inflation hawks at arms’ length, with half of its members expecting rates to remain at zero through 2022. But in the weeks that followed, inflation readings remained stubbornly elevated, a new read on wage growth was higher than expected, and the pivot was on. By December, the median committee member was calling for three rate hikes, and market participants were expecting four or even five. But while inflation was the catalyst for the pivot, it will not be what determines the Fed’s rate policy in 2022. That honor goes to the yield curve. Yield Curve, FOMC Actions 14 12 10 8 6 4 2 0 3.00 2.50 2.00 1.50 1.00 0.50 0.00 -0.50 2015 2016 2017 2018 2019 2020 2021 # of Mentions Rate cut Rate hike Percent # of Mentions (right scale) Avg 10Y–3M Spread (left scale) Notes: “Number of mentions” refers to the number of times the phrase “yield curve” appeared in the FOMC’s meeting minutes, excluding references to foreign central banks and discussion of yield curve control policy. Rate spread measures the average difference in yields between 10-year and 3-month Treasuries during the inter-meeting period. Sources: Board of Governors of the Federal Reserve, U.S. Treasury Dept.
11 THE NAFCU JOURNAL March–April 2022 The yield curve, approximated here as the spread between long-term (10-year) and short-term (3-month) Treasury rates, played a prominent role in the last tightening cycle. A succession of rate hikes in 2017 and 2018 was premised on the expectation that long-term rates would soon reflate, thus avoiding an inversion of the curve of the types which has historically preceded recessions. However, a rise in long-term rates failed to materialize, and the Fed’s actions led to a steady compression in spreads. Minutes from the FOMC’s meetings show that the yield curve was a chief concern in 2018 when the 10-year/3-month spread shrunk to just over 100 basis points. By the time the Fed completed its last hike in December of that year, the spread was less than 50 basis points. The Fed quickly reversed course, emphasizing a more patient approach. By the middle of 2019, the curve inverted and the Fed was forced to cut rates. While the FOMC is clearly intent on reducing policy accommodation in 2022, it has several options. Namely, it can raise rates or reduce the size of its balance sheet. The former will target short-term rates while the latter is believed to impact longer-term rates. But while rate hikes have a definite impact on short-term rates, the effects of reducing the balance sheet are more unclear. In the event that spreads decline, the committee is likely to put rate hikes on pause and focus on the balance sheet. But that process is not at all certain to achieve a timely increase in long-term rates. It is also notable that the FOMC is entering this tightening cycle at a time when spreads are lower than they were prior to liftoff in the last cycle. The pandemic packed an incredible amount of volatility into a very short space of time. In the process, it made inflation a topic of conversation at every dinner table and thrust central bankers into an uncomfortable spotlight. But regardless of the Fed’s intentions, the speed of policy normalization will depend largely on the space afforded by long-term rates. In the event that rates prove uncooperative, the policy normalization process is likely to be a longer one than markets are expecting, and Fed officials will be a lot more interesting than they would prefer. “A succession of rate hikes in 2017 and 2018 was premised on the expectation that long-term rates would soon reflate, thus avoiding an inversion of the curve of the types which has historically preceded recessions. However, a rise in long-term rates failed to materialize, and the Fed’s actions led to a steady compression in spreads.”
Credit Unions Turn To Technology To Enhance Services FINTECH PARTNERSHIPS ADD FLEXIBLE, INNOVATIVE STRATEGIES In the 2020 NAFCU Report on Credit Unions, over 94% of survey respondents reported that IT will drive spending into 2023. When asked to identify the most likely provider for their planned investments, national vendors and large fintechs were named most often. “There has been an increase in credit union and fintech partnerships and as our NAFCU reports indicate, there is a continuing interest in greater investment in fintech over the next several years,” said Andrew Morris, senior counsel for research and policy for NAFCU. Although many people associate “fintech” with more recently developed technology, the use of financial technology has been put into place at credit unions for some time, he says. “Consumer expectations for convenient service led to remote deposit of checks many years ago,” he points out. “So while some fintech technologies are new, the concept of using technology to increase convenience for members is not new.” By Sheryl S. Jackson 12 THE NAFCU JOURNAL March–April 2022
13 THE NAFCU JOURNAL March–April 2022
14 THE NAFCU JOURNAL March–April 2022 “The past two years of the pandemic have really accelerated technology adoption by credit unions,” said Jeff Keltner, senior vice president of business development at Upstart. “Member needs today are vastly different than they were five years ago due to the rapid adoption of mobile technology and the bar that companies like Netflix and Amazon have set for customer service. One of the benefits of fintech’s growth in recent years is that the most advanced technologies are now within reach, and budget, for credit unions of all asset sizes.” There are a number of ways that credit unions and fintechs work together. “Every fintech partnership is built differently and begins with different goals in mind, such as improving member experiences, growing the credit union, enhancing internal operations, expanding into new member segments and more,” explained Keltner. Some credit unions work through a CUSO structure versus directly with a fintech, which is beneficial because it allows credit unions to combine their resources while still retaining ownership of the technology, he said. “The most important thing about these engagements—whether they’re through a CUSO or not—is that the relationship is viewed as a partnership rather than a vendor/buyer arrangement. Rather than something transactional, a partnership implies shared risk and reward between the two organizations—vendor relationships are much more functional whereas partnerships are strategically evaluated at the board level.” Why Partner with Fintech? “The primary reason we partnered with a fintech was to gain access to a strong performing loan portfolio that would complement what we originated organically,” said Jim Merrill, president and CEO at Inspire Federal Credit Union. “Consumers traditionally went to credit unions for personal, unsecured loans but about five to ten years ago, fintechs changed the market with their deeper pockets and an easy, convenient way for consumer to apply for and get loans.” As credit unions lost their dominance in the consumer loan space, more partnered with technology companies to regain access to those loans, he explained. “Fintechs don’t have the balance sheet capacity that credit unions have, so it can be a win-win partnership for both,” he added. “We have established credit parameters as well as underwriting requirements for loans we buy from our fintech partner, because the borrower must open an account with us and must reside in our geographic area served,” said Merrill. “These requirements not only meet regulatory requirements, but they ensure we are able to acquire new members at a low cost and establish a relationship that allows us to communicate with them about other products.” At one time, a popular product offered by Franklin Mint Federal Credit Union was a student loan, but after origination and administration of those loans was taken over by the government, the credit union no longer offered loans to students. “Then we had members approach us for loans that finance the gap between their school costs and their federal loans,” said Allan Stevens, senior vice president and chief credit officer for FMFCU. Although the credit union has a strong relationship with schools and universities in the area, there was no product that fit members’ needs. “In 2018, we intentionally looked for a fintech partner that would allow us to fill the gap,” he said. “After years of saying ‘no’ to requests for gap financing, we are able to say ‘yes’ now.” More recently, FMFCU has turned to fintech partners to find loans that can help the credit union manage its growing liquidity, said Stevens. “We have developed relationships with fintechs that We have developed relationships with fintechs that specialize in personal and vehicle loans, but also have expanded to include auto refinancing. ALLAN STEVENS, SENIOR VICE PRESIDENT AND CHIEF CREDIT OFFICER FOR FMFCU Member needs today are vastly different than they were five years ago due to the rapid adoption of mobile technology and the bar that companies like Netflix and Amazon have set for customer service. JEFF KELTNER, SENIOR VICE PRESIDENT OF BUSINESS DEVELOPMENT AT UPSTART
15 THE NAFCU JOURNAL March–April 2022 Members want our assistance with financial wellness, offering services that align with their personal interests and helping them feel like part of the solution to the causes that are important to them. THOMAS NOVAK, VICE PRESIDENT AND CHIEF DIGITAL OFFICER WITH VISIONS FEDERAL CREDIT UNION specialize in personal and vehicle loans, but also have expanded to include auto refinancing.” Fintech partnerships can enhance member relationships by improving convenience and offering new, innovative services more quickly, said Jonathan Price, executive vice president of emerging businesses, corporate and business development for Q2. While there has been a credit union mindset that fintech companies are competing for credit union business, the past few years have shown the need for adoption of technology to handle interactions with members, he added. “Open-access platforms that allow credit unions and fintechs to innovate together, are making partnerships and implementation of programs happen faster,” he said. “In some cases, end-toend implementation can drop from nine to 15 months to six weeks.” Thomas Novak, vice president and chief digital officer with Visions Federal Credit Union has been co-creating on a platform that connects fintechs with credit unions. Credit unions do not have the in-house capabilities to identify, create, test and deploy solutions quickly, he said. Speed of deployment is critical because garnering support for ongoing innovations requires results that demonstrate the investment is beneficial to members and to the organization. “By the time we can development an in-house solution, priorities may have shifted and the solution is no longer needed,” he said. “Working with fintechs, we were able to deploy a product that generated thousands of enrollees in just a few months.” Fintech solutions don’t have to be limited to traditional banking transactions such as deposits, loans or checking transactions, said Novak. “The role of how we serve members is changing, and it is a battle for relevancy in today’s environment,” he said. “Members want our assistance with financial wellness, offering services that align with their personal interests and helping them feel like part
16 THE NAFCU JOURNAL March–April 2022 of the solution to the causes that are important to them. Fintechs can make all that happen.” He added, “We have to look at our members’ needs holistically and go beyond traditional banking.” Challenges and Opportunities One of the challenges with fintech partnerships is actually related to regulatory issues, said Morris. “The use of artificial intelligence (AI) solutions, especially in underwriting loans, is a regulatory concern if the credit union does not fully understand how the model works or doesn’t monitor outcomes on a regular basis,” he said. “Testing the model and using well-known tactics to manage legal risk is important, so be cognizant of AI from a regulatory perspective.” In some cases, partnering with a fintech requires members to switch from one website to another to conduct business, but the emergence of application program interfaces (APIs) is changing the structure of fintech-credit union relationships, said Vince Passione, CEO and founder of LendKey. “Use of APIs in these solutions will create a seamless customer experience that strengthens the relationship between the credit union and the member.” Although fintech partnerships are usually associated with member-facing solutions, Passione pointed out that these partnerships can provide operational efficiencies as well. “For example, AI has applicability beyond just enhancing the credit decisioning process and can be utilized to customize member outreach distinguishing between preferences like phone, email or text,” he said. “Robotic process Open-access platforms that allow credit unions and fintechs to innovate together, are making partnerships and implementation of programs happen faster. JONATHAN PRICE, EXECUTIVE VICE PRESIDENT OF EMERGING BUSINESSES, CORPORATE AND BUSINESS DEVELOPMENT FOR Q2
Credit Union Boards have the important job of building and retaining a leadership team that’s committed to driving success. Executive benefit plans are an important component that helps with attracting, retaining, and motivating your key leadership. Let one of the industry’s longest running surveys help you hone your executive recruitment, retention, and succession strategies for your top talent. Participate today in the 2022 NAFCU–Gallagher Executive Compensation and Benefits Survey to gain new strategies from your peers. Consulting and insurance brokerage services to be provided by Gallagher Benefit Services, Inc. and/or its affiliate Gallagher Benefit Services (Canada) Group Inc. Gallagher Benefit Services, Inc., a noninvestment firm and subsidiary of Arthur J. Gallagher & Co., is a licensed insurance agency that does business in California as “Gallagher Benefit Services of California Insurance Services” and in Massachusetts as “Gallagher Benefit Insurance Services.” Investment advisory services and corresponding named fiduciary services may be offered through Gallagher Fiduciary Advisors, LLC, a Registered Investment Adviser. Gallagher Fiduciary Advisors, LLC is a single-member, limited liability company, with Gallagher Benefit Services, Inc. as its single member. Certain appropriately licensed individuals of Arthur J. Gallagher & Co. subsidiaries or affiliates, excluding Gallagher Fiduciary Advisors, LLC, offer securities through Kestra Investment Services (Kestra IS), member FINRA/SIPC and or investment advisory services through Kestra Advisory Services (Kestra AS), an affiliate of Kestra IS. Neither Kestra IS nor Kestra AS is affiliated with Arthur J. Gallagher & Co., Gallagher Benefit Services, Inc. or Gallagher Fiduciary Advisors, LLC. Neither Kestra AS, Kestra IS, Arthur J. Gallagher & Co., nor their affiliates provide accounting, legal, or tax advice. Investor disclosures https://bit.ly/KF-Disclosures © 2022 Arthur J. Gallagher & Co. For Institutional Use Only. Not for Public Distribution. Gallagher is the NAFCU Services Preferred Partner for Executive Benefits and Compensation Consulting. Learn more at www.nafcu.org/Gallagher Survey closes April 29, 2022. Contact Liz_Santos@AJG.com to take the survey today. National Report 2021 NAFCUGALLAGHER EXECUTIVE COMPENSATION AND BENEFITS SURVEY The metrics you need to lead your mission to success.
18 THE NAFCU JOURNAL March–April 2022 Robotic process automation can be used to integrate legacy systems with newer platforms as an interim step to a full systems migration, eliminating manual steps and providing audit and quality controls. VINCE PASSIONE, CEO AND FOUNDER OF LENDKEY automation can be used to integrate legacy systems with newer platforms as an interim step to a full systems migration, eliminating manual steps and providing audit and quality controls.” Factors to Consider There are a number of factors to consider before working with a lending fintech, suggested Merrill. “First, does the type of loan fit with your credit union’s strategic direction for the budget and balance sheet? You must be comfortable with the loan,” he said. “Then, decide what type of relationship you want—partnership or vendor-customer. I prefer to work with partners so we build trust, grow together and develop a mutually beneficial relationship that aligns with our organization’s goals to serve members.” In addition to understanding how the fintech’s business model works, be sure to clearly identify who does what, recommended Stevens. “Who originates the loan and who services the loan are questions to ask, and then you can look closely at the impact on the credit union’s resources,” he said. “A deep dive into the company’s regulatory compliance processes, information security and a clarification of quality control—how they and the credit union will monitor results—is also important.” Overall, the due diligence process before choosing a fintech is similar to due diligence for any business vendor or partner, said Stevens. “We always talk to three or more credit unions that have worked with the fintech to see if there have been compliance issues or other concerns that we need to consider.” Fintech partnerships mean that technology is no longer a limiting factor for credit union success, said Novak. “As long as credit unions and fintechs are both flexible as they work together to create services and products that members want and credit unions can develop new business while still protecting member assets,” he said. “This flexibility might mean thinking outside the box for the credit union, but it will result in a more agile, more member-centric approach to serving members.”
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20 THE NAFCU JOURNAL March–April 2022 2 22 LITIGATION OUTLOOK Make Sure Fees Are Charged as Stated in Agreements By Sheryl S. Jackson
21 THE NAFCU JOURNAL March–April 2022 The size of settlements for claims against credit unions over the past few years are significant. Three examples include: $1.8 million for a northeast credit union,1 $1.5 million for a western credit union2 and $16 million for a national credit union.3 There is no magic formula to completely protect a credit union from a lawsuit filed by an unhappy member, but there are ways to mitigate litigation risks, says David Park, NCCO, Senior Regulatory Compliance Counsel, NAFCU. “We expect to continue seeing litigation related to different types of fees charged by credit unions throughout the year, with most of those claims brought under state laws,” he says. “In many cases, the allegations are for breach of contract or unfair and deceptive trade practices.”
THE NAFCU JOURNAL March–April 2022 The most common situations that have resulted in litigation recently and are expected to continue or increase involve: ■ Overdraft fees ■ Insufficient or non-sufficient funds fees ■ ATM fees ■ Foreign transaction fees Overdraft and insufficient funds fees represent a key focus on claimants and their attorneys, especially with the increased reliance on debit cards as retailers and consumers moved away from cash to payments that required less contact during the pandemic. Approval and Settlement Timing Critical “We are seeing more overdraft claims where debit card transactions might be approved at the time of the transaction, but when the transaction is settled with the credit union, other charges have reduced the account balance to the point an overdraft fee is charged,” says Park. The situation is referred to as “authorized positive, settled negative” and is a practice that has been described in some of the banking agencies’ supervisory highlights as being one that is unfair and deceptive, he adds. Similarly, an insufficient or non-sufficient funds (NSF) fee poses risks related to presentment of the transaction for payment, says Park. “The problem occurs when the withdrawal or debit charge is first presented and an NSF fee is applied to the account, then the merchant resubmits the charge multiple times, which generates NSF charges for each attempt,” he says. “While the credit union sees each attempt as a separate transaction when presented, consumers and their attorneys say that each attempt is part of the same, original transaction.” The same argument is made in cases against credit unions for ATM fees. When a member makes a balance inquiry at an ATM other than the credit union’s network of ATMs to make sure the withdrawal won’t exceed the balance available, and then withdraws money, there are sometimes two ATM fees applied—one for each action. “The claims allege that both actions are part of the same transaction, so only one fee should be applied,” explains Park. As the retail industry becomes more global, and people order from online sites more frequently, it is often hard to tell where the retailer is located.4 This has led to claims filed against credit unions that charge foreign transaction fees, says Park. “Members are not surprised when foreign transaction fees are assessed when credit and debit cards are used outside the United States or Puerto Rico, but some members have been surprised to see those fees charged on purchases they made from their homes.” Steps to Mitigate Risk “The most important step a credit union can take to mitigate the risk of these types of lawsuits is to carefully and regularly review account agreements, disclosures and practices and determine whether everything aligns and complies with applicable law,” says Park. “All of these cases turn on what the account contract says, what policies and procedures require, what is required by law and what the member is told.” A combination of reviews of agreements, disclosures, policies and procedures along with proper training for employees is essential to mitigate risk, points out Park. “Another way to reduce risk, at least in the context of overdraft litigation, is a step some institutions, especially large banks, are taking—eliminating overdraft fees,” he says. “This is a strategic issue for some financial institutions as they look at the risk of a large claim settlement and legal fees compared to collection of the fees.” The choice to eliminate overdraft fees can be considered but is not required by the Consumer Financial Protection Bureau (CFPB) or the National Credit “The most important step a credit union can take to mitigate the risk of these types of lawsuits is to carefully and regularly review account agreements, disclosures and practices and determine whether everything aligns and complies with applicable law. All of these cases turn on what the account contract says, what policies and procedures require, what is required by law and what the member is told.” 22
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24 THE NAFCU JOURNAL March–April 2022 Union Administration (NCUA), says Park. “While there is a lot of uncertainty about what both agencies might do with respect to overdrafts, both agencies have indicated that this is an area on which they will focus.” Another way to mitigate risk is to look at the level of CFPB complaints and other litigation and to comparatively assess your risk in those areas of higher risk. CFPB complaints have increased year over year for 2021 according to statistics compiled by WebRecon, a litigation research firm, says Park. While the level of Fair Credit Reporting Act and Fair Debt Collection Practices Act litigation has remained somewhat stable when looking at WebRecon’s analysis for 2020 and 2021, Telephone Consumer Protection Act litigation has significantly decreased. Emerging Risks The increased reliance on fintech companies and other third parties to provide technology to enhance services to members also poses a risk that credit unions should take steps to mitigate before entering any agreements, suggests Park. “Just as with any third-party relationship, NCUA requires that credit unions take certain steps to ensure that they understand the risks posed by outsourcing work to third parties,” he says. These steps include things like performing a risk assessment and considering how the proposed third-party relationship might affect the seven areas of risk that NCUA looks at in an exam. For those credit unions who partner with third parties that provide models and algorithms that might be used in decisioning, it is critical to be to explain how those decisions are made. “Understand how the algorithm works and conduct due diligence to be sure the supplier meets all regulatory expectations for credit unions.” While the upfront work is important, he also adds, “The credit union must also monitor the fintech’s ongoing performance and outcomes because the credit union can be held responsible for compliance failures.” Overall, the best defense against growing and emerging risks is to go on the offensive. “Be proactive in reviews of agreements, disclosures, policies and procedures,” reiterates Park. “A credit union’s best defense against claims is proof that the member was informed and that the credit union’s actions aligned with the terms of the governing agreement, any disclosures provided by the credit union and applicable law.” References 1. Steward J. Digital Federal Credit Union settles $1.8M class action suit. American Banker. October 15, 2019. americanbanker.com/ creditunions/news/digital-federal-credit-union-settles-18m-class-action-suit 2. Strozniak P. American Airlines FCU to Pay $1.5 Million to Settle Overdraft Fee Dispute: California woman who filed the class action lawsuit will be paid a $15,000 service award. Credit Union Times. August 11, 2021. cutimes.com/2021/08/11/american-airlines-fcu-to-pay-1-5million-to-settle-overdraft-fee-dispute/ 3. Buckley Firm. Parties File Unopposed Settlement Requiring Credit Union to Pay $16 Million to Resolve Insufficient Funds Fee Lawsuit. October 27, 2020. buckleyfirm.com/blog/2020-10-27/parties-file-unopposed-settlement-requiring-credit-union-pay-16-million-resolveinsufficient-funds-fee-lawsuit 4. Strozniak P. Navy Federal Credit Union Faces Second Class Action Lawsuit Over Fees: Member claims she was unlawfully charged an international transaction fee for buying a product online from an overseas retailer. Credit Union Times. January 13, 2021. cutimes.com/2021/01/13/navy-federal-credit-union-faces-second-class-action-lawsuit-over-fees/ “For those credit unions who partner with third parties that provide models and algorithms that might be used in decisioning, it is critical to be to explain how those decisions are made. Understand how the algorithm works and conduct due diligence to be sure the supplier meets all regulatory expectations for credit unions.”
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28 THE NAFCU JOURNAL March–April 2022 Diversity, equity and inclusion in a credit union is a two-prong strategy. The first step is to ensure that leadership and staff of credit unions reflect the communities they serve. The second step is to make sure that products and services provided reflects the specific needs of members and potential members in the community. Recognizing that input from the community is essential to identify new products and improve existing services. MariSol Federal Credit Union relies on an ongoing advisory committee comprised of five to seven people who are leaders and volunteers from the community. “Pre-COVID, we met with the advisory committee in person once each quarter,” said Robin Romano, CEO of MariSol Federal. In addition to talking about what products are needed, the committee also shares thoughts on opportunities to expand financial education in the community with suggestions on where and when outreach can happen. “We have been a Community Development Financial Institution (CDFI) since 2010, and our membership is very diverse, with about one-half of our membership Hispanic as well as a high percentage of the Black community since the credit union has historically been adjacent to historic Phoenix Black neighborhoods,” said Romano. While the credit union was always diverse, the higher percentage of Hispanic members was the result of an emergency merger with another credit union that was predominately Hispanic. “In addition to the community advisory committee, our employees are involved in community projects, boards and organizations that help us identify needs that are not being met.” One example of a “community need” is a loan to finalize the citizenship process, said Romano. “The package of forms and information is completed by the individual, but a check is needed, so these loans provide the certified funds needed to send with the citizenship application,” she said. “We also have a zero percent COMMUNITY INVOLVEMENT HELPS IDENTIFY UNMET NEEDS
29 THE NAFCU JOURNAL March–April 2022 loan program for citizenship developed for Deferred Action for Childhood Arrivals (DACA) as a result of our conversations with a local organization that works with DACA applicants.” When MariSol Federal became a CDFI, one of their first grants enabled them to set up a mobile branch at local Hispanic grocery stores. The vehicle had the credit union name and logo to clearly identify it, and staff were able to handle simple transactions and open accounts. “The most important goal of the mobile branch was to give our staff a chance to listen and learn from people in the community,” said Romano. “We learned that short-term, high interest loans were predominant in the area we gained from the merger, so we created an alternative —a four-month, unsecured loan that is underwritten based on the behavior of the member’s use of a checking account.” The loan is now a six-month loan and qualification requires a checking account into which a paycheck or other income is direct deposited along with responsible use of the checking account. “We have had a great deal of success with this product and have a very low delinquency rate,” she added. Education is also a key component of community outreach for Marisol Federal, and the credit union offers financial literacy classes throughout the community. Not only does the credit union go into the community to offer classes, but classes are conducted in both Spanish and English. The community development team at SkyPoint Federal Credit Union is also bilingual, which is important to providing information to a Hispanic audience, said Audra Pettus, community relations director at SkyPoint. The ability to provide information in Spanish is critical, even if some family members speak English, she explained. “Parents often rely on their children to interpret for them, and financial conversations can be very complex, which makes it difficult for children to interpret,” she said. “When we can communicate with them in their language, we build trust as we share information that will help them learn about banking and financial issues.” However, relating to the community goes beyond speaking their language, pointed out Pettus. “The underserved and underbanked in our communities are minorities—Hispanic and Black—so the people who present financial literacy programs or who are at community events reflect the community,” she said. Her team is comprised of people representing both minorities who are skilled One example of a “community need” is a loan to finalize the citizenship process. The package of forms and information is completed by the individual, but a check is needed, so these loans provide the certified funds needed to send with the citizenship application. ROBIN ROMANO, CEO OF MARISOL FEDERAL at teaching financial wellness and credit building strategies. “Financial literacy is not taught in schools, and if people don’t learn it at home, the lack of knowledge about credit, budgeting and borrowing becomes a vicious cycle.” SkyPoint became a CDFI in 2018, with the goal of providing economic opportunity in low-income communities, but a more formal, structured program that combines financial literacy education along with a suite of products developed specifically for the underserved market in the community is now available. The products, which include up to seven different lending products for members who may have credit issues or specific needs, consider the challenges members may have. “We work with community partners who align with our goals for financial literacy to increase our visibility in the community,” said Pettus. Community efforts include drives to collect canned food, candy and school supplies at appropriate times of the year and an Angel Tree at Financial literacy is not taught in schools, and if people don’t learn it at home, the lack of knowledge about credit, budgeting and borrowing becomes a vicious cycle. AUDRA PETTUS, COMMUNITY RELATIONS DIRECTOR AT SKYPOINT
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