(Dec. 18, 2020) NASCUS President and CEO Lucy Ito, in a press statement, praised the NCUA Board for finalizing the subordinated debt rule, noting the state system’s long support for such action.
“The state system has long said that subordinated debt should be a part of the risk-based capital framework because it encourages well-managed credit unions to attract additional loss-absorbing forms of capital that they would otherwise forego,” said NASCUS President and CEO Lucy Ito. “The risk-based capital rulemaking itself is intended to increase the capital buffer standing of a credit union before any effect on the share insurance fund, and subordinated debt is consistent with that goal.”
Ito also thanked the board for moving forward on the final rule, which has been in the works for at least four years. She said NASCUS and state regulators look forward to working closely with NCUA in preparing for the implementation of the subordinated debt rule, and related capital rules, given the state system’s familiarity and experience with this form of capital
LINK:
Press statement by Lucy Ito on subordinated debt adoption
(Dec. 18, 2020) In other action at Thursday’s meeting, the NCUA Board issued one final rule and three proposed regulations – with three of those approved on split votes after Board Member Todd Harper (the lone Democrat appointee on the board) voted in opposition all three times.
The board:
- Approved (unanimously), an extension to Dec. 31, 2021 for a temporary final rule that increases the maximum aggregate amount of loan participations that a federally insured credit union (FICU) may purchase from a single originating lender without seeking a waiver from NCUA to the greater of $5 million or 200% of the FICU’s net worth (up from the greater of $500 million or 100% of the FICU’s net worth). The rule had been slated to expire at year’s end. The temporary rule, adopted by the NCUA Board as a relief measure for credit unions in the midst of the coronavirus crisis last spring, took effect April 21.
- Issued a proposed rule (on a 2-1 vote) on field of membership shared facility requirements (under Part 701, Appendix B, of agency rules) that NCUA said is intended to modernize requirements related to service facilities for multiple common bond (MCB) federal credit unions (FCUs). NCUA said the proposal includes any shared branch, shared ATM, or shared electronic facility in the definition of “service facility” for an MCB FCU that participates in a shared branching network. “The FCU need not be an owner of the shared branch network for the shared branch or shared ATM to be a service facility,” the agency said. “These changes would apply to the definition of service facility both for additions of select groups to MCB FCUs and for expansions into underserved areas.” Harper said he questioned the proposal’s ability, without changes, to increase service to underserved areas. The proposal will have a 30-day comment period.
- Released a second proposed rule (on a 2-1 vote), this one on mortgage servicing rights (under Parts 703 and 721 of agency rules), which would amend the agency’s investment regulation to permit FCUs to purchase mortgage servicing rights from other federally insured credit unions subject to certain conditions. Harper called the proposal “half baked,” but said he could find a way to support a final rule if changes were made. The proposal will be issued with a 30-day comment period.
- Advanced yet a third proposed rule – this one on overdraft policy (under Part 701 of NCUA rules) – also on a 2-1 vote. The proposal would remove the requirement that an FCU’s written overdraft policy establish a 45-day time limit for a member to either deposit funds or obtain an approved loan from the FCU to cover each overdraft, and replace it with a requirement that the written policy must establish a specific time limit that is “both reasonable and applicable to all members for a member either to deposit funds or obtain an approved loan from the FCU to cover each overdraft.” In May, the board tabled a proposed interim final rule to let FCUs decide how long members have to resolve account overdrafts. The proposal was tabled after failing to win a second from one of two board members when Chairman Hood asked for it (both members Harper and McWatters expressed opposition to a final rule). Back in May, Harper said the rule would (among other things) allow credit unions to garnish members’ income – including any economic stimulus relief funds – to pay off overdraft debt. Harper reiterated his objections Thursday (“I couldn’t support it then, I can’t now,” he said). Comments are due 30 days after publication in the Federal Register.
The board also set the “normal operating level” for the National Credit Union Share Insurance Fund (NCUSIF) at 1.38 for the coming year, no change from 2020. The NOL represents the target level of reserves in the fund relative to shares insured (referred to as the equity level). Generally, it is the level of reserves the board believes is needed to deal with anticipated losses from credit unions (if any) throughout the year, without lowering the reserving rate below 1.20%, the point at which an insurance premium would be required.
Along those lines, staff told Board Member Harper that it estimates the equity level of the fund at year-end will be 1.32% — well above the level at which a premium would be required. Agreeing with staff that chances of a premium in 2021 now look “next to zero,” Harper said that would be “welcome news to many credit unions.”
LINKS:
Temporary Final Rule, Regulatory Relief in Response to COVID-19
Proposed rule, Field of Membership Shared Facility Requirements
Proposed Rule, Mortgage Servicing Rights
Proposed Rule, Part 701, Overdraft Policy.
Board Briefing, Share Insurance Fund 2021 Normal Operating Level
(Dec. 18, 2020) Kyle Hauptman, sworn in as the latest (and 24th) member of the NCUA Board this week prior to participation in the Thursday and today’s board meetings, said he has three priorities as a board member: managing the fallout from the current pandemic and economic downturn, expanding the role of technology, and aligning incentives.
“Credit unions were chartered to serve those of modest means. I plan to work with credit unions, my fellow board members, and Congress on solutions for those facing financial stress,” said Hauptman in a release from NCUA. Echoing comments he made to the Senate Banking Committee last summer during his confirmation hearing, Hauptman added that he wants to “expand technology’s role in reaching the underserved because innovation can provide more inclusive financial services.
The newest board member also said that the practice of less-frequent exam cycles for credit unions with the highest marks “will incent them to maintain that benefit and allow the NCUA to focus more of its attention on problematic credit unions.”
Hauptman, nominated June 18 to the NCUA Board by President Donald Trump, has most recently served as a staff director for the Senate Banking Committee Economic Policy subcommittee and as an economic policy advisor to Sen. Tom Cotton (R-Ark.). He worked on the 2016 Trump presidential transition team and served as a policy advisor on financial services for 2012 Republican presidential nominee Mitt Romney (now a U.S. senator representing Utah).
According to NCUA’s release Monday, Hauptman holds a master’s in business administration from Columbia Business School and a bachelor of arts from University of California, Los Angeles
LINK:
Hauptman Sworn in as NCUA Board Member
(Dec. 18, 2020) With a rare second monthly meeting scheduled for today (Friday, Dec. 18), the full-complement NCUA Board will consider the 2021 budget for the agency, which includes an increase of 1 percentage point for the overhead transfer rate (OTR), the rate at which the agency transfers funds from the federal savings insurance fund to the operating budget of the agency to cover its “insurance-related costs.”
More coverage of the meeting, which ensues after NASCUS Report’s deadline, will be included in next week’s report.
The board is expected to approve the $342.5 million budget as proposed, although likely on a split vote. Board Member Todd Harper has voiced objection to the lack of funding for consumer protection compliance staff in the budget and has said he would not support the budget unless that funding was put into place. Board Chairman Rodney Hood has no such objections; newest Board Member Kyle Hauptman (a Republican appointee like Hood) is expected to follow Hood’s lead on the budget.
For its part, NASCUS has taken no position on the budget, except with respect to the increase in the OTR, which would be 62.3% in 2021 (up from 61.3% in 2020).
In testimony two weeks ago before the NCUA Board at its public briefing about the 2021 budget, NASCUS urged NCUA to consider making changes to how it allocates expenses through the OTR to insurance-related activities, in order to ensure balance, equity and that more funds are available to cover any losses that may occur due to the financial impact of the coronavirus crisis.
“The 1% increase in the OTR for 2021 means there will be $3.3 million less to cover losses by the fund,” NASCUS’s Lucy Ito told the board. She noted that NASCUS recognized its recommendations cannot be implemented for 2021, but that the state system hopes they would be considered for future budgets. “We want to work with NCUA,” she said.
Friday’s board session is scheduled to get underway at 10 a.m. ET, and is being live-streamed via the Internet.
LINK:
NCUA Board Agenda for the Dec. 18, 2020 meeting
(Dec. 18, 2020) NASCUS is in touch with federal authorities about the recent – and some say catastrophic – hack of IT systems by a nation-state hacker group that was revealed over last weekend through products offered by IT software provider SolarWinds.
The hack, according to documents filed by SolarWinds early this week with the Securities and Exchange Commission (SEC), appears to have affected about 18,000 of the firm’s 300,000 customers. The hackers reportedly inserted malware into updates for Orion, a software application by SolarWinds for IT inventory management and monitoring. The versions affected were 2019.4 through 2020.2.1, released between March 2020 and June 2020. According to reports, the malware allowed attackers to deploy additional and highly stealthy malware on the networks of SolarWinds customers. SolarWinds has not yet said how hackers breached its own network.
However, as indicated by the relatively narrow scope of those affected by the hack, the attack was targeted to specific groups using the software, including the Treasury Department, and the Department of Commerce’s National Telecommunications and Information Administration (NTIA).
Other federal government customers known to be using the software (but which may or may not be affected by the hack) include the Cybersecurity and Infrastructure Security Agency (CISA), U.S. Cyber Command, the Departments of Defense, Homeland Security, Energy and Veterans Affairs, the FBI, and others. Customers in other countries may also have been affected, including governments.
NASCUS is participating in a number of conversations among federal regulators regarding the hack, most of which are confidential, and monitoring developments. However, during the conversations, groups such as NASCUS have been urged to encourage their members to review the CISA emergency directive on the compromise and plug into the agency for updates as they become available.
LINK:
CISA emergency directive on SolarWinds/Orion management products
(Dec. 18, 2020) A new proposal that would require financial institutions to provide “prompt notification” to their federal regulators upon occurrence of a security incident may be coming to an NCUA Board meeting in the not-so-distant future.
This week, federal banking regulators released a joint proposal (with a 90-day comment period) requiring banks to provide the notification no later than 36 hours after the banking organization believes in good faith that an incident occurred. The notification requirement, the proposal states, is intended to serve as an early alert to a banking organization’s primary federal regulator “and is not intended to provide an assessment of the incident.”
NCUA was not included in the joint release. However, given the scope of the proposal (and the recent highly publicized SolarWinds hack) it’s possible the credit union regulator may soon issue its own version for entities under its supervision.
However, the bank regulators’ proposal does something NCUA cannot now do: require a bank service provider to notify at least two individuals at affected banking organization customers immediately after the bank service provider experiences a computer-security incident that it believes in good faith could disrupt, degrade, or impair services provided for four or more hours.
Also this week, the FDIC for the first time included consideration of competition presented by credit unions when less-than-well-capitalized banks are facing interest rate restrictions by the regulator. Under the new rule adopted by the agency’s board, interest rates offered by credit unions in a market area could be cited by a bank as a way of mitigating the level of restrictions.
(Dec. 18, 2020) The Credit Union Department of the Washington Department of Financial Institutions has two job openings (which are posted on nascus.org right now): Financial Examiner 2-3 and Financial Examiner Supervisor. See the link to our “state job announcements” on the website … A predicted collapse did not materialize of some financial institutions and others due to over-investment in leveraged loans and collateralized loan obligations (CLO) as a result of the financial impact of the coronavirus crisis, according to a report issued this week. The report indicated that’s because of large banks’ strong capital positions and other factors. The new report issued by the congressional watchdog Government Accountability Office (GAO) added that federal regulators remain cautious about financial stability and urged the Treasury Secretary and Congress to take action … Due to the upcoming holidays, NASCUS Report will be published early next week, on Wednesday (Dec. 23). The following week (Dec. 28-Jan. 1) NASCUS Report will be taking a break, with publication resuming the following week (Jan. 4).
LINKS:
NASCUS state job announcements
(Dec. 11, 2020) State credit unions maintained their hold of half of all credit union assets during the third quarter, according to the latest quarterly financial results released by NCUA late last week, and other results compiled by NASCUS.
However: asset growth for all charters of credit unions – state (federally and privately insured) and federal – dropped off considerably during the third quarter.
According to the third-quarter results from NCUA (and results from privately insured credit unions collected by private insurer American Share Insurance (ASI) and compiled by NASCUS), state credit unions (SCUs, federally and privately insured) held $901.5 billion in total assets, up 15.3% since the beginning of the year. That accounts for 49.9% of all credit union assets. Federal credit unions, (FCUs) meanwhile, held $905.6 billion in assets, up 12.8% from the year’s start – and accounting for 50.1% of all assets. There were 2,027 SCUs, and 3,213 FCUs, at the end of the third quarter.
Much of the asset growth, however, occurred in the first half of the year – particularly the second quarter – and asset growth slowed in the third quarter. For example, assets for SCUs expanded from year-end 2019 by 12.6% in the first six months of the year (about 8.4% in the second quarter), but only by about 2.7% from the second to the third quarter. FCUs saw a similar growth pattern, with asset growth at mid-year of 10.9% from the end of 2019, but only 1.8% from the second to third quarter.
An influx of savings spurred by stimulus checks to individuals (which were largely recorded in the second quarter), and by payments for enhanced unemployment insurance (UI) and through the Paycheck Protection Program (PPP) payments to workers, is attributed to the asset growth. There were no additional stimulus checks in the third quarter, and enhanced UI came to an end during the quarter.
“Although the 2,037 state-chartered credit unions make up only about 39% of all credit unions across the nation, they have an outsize influence on the lives of their nearly 60 million members who trust these institutions to safeguard their savings and provide them with needed financial services,” said NASCUS President and CEO Lucy Ito, referring to the more than 48% of all credit union members who belong to SCUs.
Other results from the third quarter results show:
- SCU memberships have grown by 3.3% since the beginning the year (1.4% during the third quarter, adding more than 810,000 memberships). FCUs have expanded their memberships by 2.2% since year-end 2019, and less than 1% in the third quarter for 600,000 memberships. Since the end of last year, more than 3.3 million memberships have been added, for a total of 125 million.
- The number of credit unions continued to drop through the first three quarters of the year, with 5,240 reporting their financial results at the end of the third quarter – 107 fewer than at the end of 2019. Of those, 37 were SCUs and 70 FCUs.
LINK:
NCUA Releases Q3 2020 Credit Union System Performance Data
(Dec. 11, 2020) As the month winds down, as well as the year, the NCUA Board apparently has decided to make the most of it — by scheduling not one but two meetings in the same week, one right after another on Thursday and Friday, including consideration of a final rule on subordinated debt.
Typically, the agency board meets once per month, and typically on the third Thursday of each month; two meetings in a month are rare. There will also (likely) be a new face at the meetings: Kyle S. Hauptman, confirmed by the Senate last week to a seat on the NCUA Board, will be available to join (after he is sworn into office).
The first meeting, on Thursday (getting underway at 10 a.m. ET and to be live streamed via the Internet), has six items on the agenda: five proposed and final rules, including a final rule on subordinated debt, and a board briefing on the 2021 normal operating level for the National Credit Union Share Insurance Fund (NCUSIF).
In January, the board unanimously issued a 275-plus page proposal to give some federally insured credit unions the ability to issue subordinated debt to help them meet their risk-based capital requirements. The proposal, issued for a 120-day comment period, would allow well-capitalized credit unions to count subordinated debt as capital for risk-based net worth purposes (the fundamental capital pool for mitigating credit union risk in their lending and investment portfolios).
Key provisions of the proposal included:
- Permission for low-income-designated credit unions (LICUs), complex credit unions, and new credit unions to issue subordinated debt for purposes of regulatory capital treatment.
- A maximum maturity of 20 years to be imposed on debt issued (with a minimum maturity of 5 years), and a minimum denomination of $100,000. The agency noted the maturity limit helps to clarify that the financial instruments issued are debt – and not equity in the credit unions (which are solely owned by the members; credit unions do not issue stock).
- Prohibitions on a credit union from being both an issuer and investor unless the credit union meets certain conditions related to mergers.
- Addition of a new section addressing new rules and limits for making loans to other credit unions, including investing in subordinated debt at those credit unions.
NCUA has said that federally insured, state-chartered credit unions (FISCUs) would be eligible for applying to issue subordinated debt if their state laws and rules allow it.
NASCUS has long said that subordinated debt should be a part of the risk-based capital framework because it encourages well-managed credit unions to attract additional loss-absorbing forms of capital that they would otherwise forego. Association leader Lucy Ito has noted that the risk-based capital rulemaking itself is intended to increase the capital buffer standing of a credit union before the share insurance fund, and that subordinated debt is consistent with that goal.
In July, NASCUS filed a comment letter in support of the proposal, writing that the development of the rule is an essential complement to the implementation of a risk-based capital rule. “Including Subordinated Debt in risk-based capital ratio calculations is consistent with the statutory purposes of both state and federal credit unions and is sound public policy,” NASCUS wrote. “This rule will help credit unions and their members, protect the share insurance fund, and help place natural person credit unions in the United States on par with credit unions and other depository institutions worldwide.”
Also on the Thursday episode of the two-day schedule of meetings are consideration of:
- A temporary final rule on regulatory relief in response to COVID-19 (Part 701)
- A proposed rule on field of membership shared facility requirements (Part 701, Appendix B, of NCUA rules);
- A proposed rule on mortgage servicing rights (Parts 703 and 721);
- A proposed rule on overdraft policy (Part 701).
The board will also hear a briefing on the 2021 “normal operating level” (NOL) for the NCUSIF, which is the level of reserves to insured savings that the fund is required to operate under (within a range set by law) each year.
LINK:
NCUA Board agenda, Dec. 17 meeting
(Dec. 11, 2020) Final approval of the 2021 NCUA budget, which includes a concerning increase in the overhead transfer rate (OTR), will be under consideration when the agency’s board meets for a second time next week, this time on Friday, likely with its full complement of three members.
The meeting is set for Friday, starting at 10 a.m. ET; it will be live streamed via the Internet.
In November, the agency unveiled a $342.5 million budget that is 1.4% smaller than the approved 2020 spending plan. However, for the following year, the agency projects spending could be increased by 6.3%, reaching $364.2 million.
The 2021 budget also includes an increase of 1 percentage point from 2020 in the OTR – the rate at which the agency transfers funds from the National Credit Union Share Insurance Fund (NCUSIF) to cover “insurance-related costs” applied to the agency’s operating budget – to 62.3%. The remainder of the budget is funded by operating fees paid by federal credit unions.
NASCUS, in testimony last week before the NCUA Board at its public briefing about the 2021 budget, urged the agency to consider making changes to how it allocates expenses to insurance-related activities, in order to ensure balance, equity and that more funds are available to cover any losses that may occur due to the financial impact of the coronavirus crisis.
“The 1% increase in the OTR for 2021 means there will be $3.3 million less to cover losses by the fund,” NASCUS’s Lucy Ito told the board. She noted that NASCUS recognized its recommendations cannot be implemented for 2021, but that the state system hopes they would be considered for future budgets. “We want to work with NCUA,” she said.
The agency’s budget, often an annual focal point of comment and criticism from within the credit union system, has been the source of some controversy this year as well. At the November NCUA Board meeting, both Board Member Todd Harper and then-Board Member J. Mark McWatters said they could not support the 2021 budget as proposed, questioning some expenses, the decrease in the total budget in the face of the financial impact of the coronavirus pandemic, and the lack of funding for consumer protection compliance examiner staff. “As long as I remain on the board, I will continue to carefully review the proposed budgets and identify those items that are not truly important to the operations and mission of the NCUA,” McWatters said.
A day later, McWatters submitted his resignation from the board, citing the impending confirmation of his replacement on the panel, Kyle S. Hauptman. The Senate voted Dec. 2, 56-39, to confirm Hauptman to the seat held by McWatters, who had been serving in a holdover capacity since his term expired in August 2019.
Hauptman is expected to be sworn in as a board member before next week’s meetings, and to join in board deliberations at that session (as well as the Thursday session considering various final and proposal regulations, among other things).
LINK:
NCUA Board agenda, Dec. 18 meeting
(Dec. 11, 2020) Following up on plans announced in the wake of reported ethics failings by former staffers, the NCUA this week announced the selection of Elizabeth J. Fischmann as its first chief ethics counsel, effective Dec. 21.
Fischmann, the agency said, will oversee the NCUA’s new Office of Ethics Counsel that will certify the agency’s compliance with relevant federal ethics laws and regulations, promote accountability and ethical conduct, and help ensure the success of the NCUA’s ethics programs, including programs designed to prevent harassment, discrimination, and misconduct in the workplace. She will report directly to the NCUA Board and will be supervised by the NCUA chairman.
Currently, Fischmann serves as the associate general counsel for ethics and designated agency ethics official for the U.S. Department of Health and Human Services, where she administers and supervises the HHS-wide ethics program. She has also served as an associate counsel at the U.S. Office of Government Ethics and Deputy Counsel for the U.S. Department of the Navy, the NCUA said. Fischmann earned a Juris Doctorate from Georgetown University Law Center and a Bachelor of Arts from the University of Virginia, according to NCUA; she’s a member of the District of Columbia and Maryland Bars.
NCUA announced plans earlier this year to establish the ethics counsel office in April, about six weeks after a report was made public by the NCUA Office of Inspector General (OIG) substantiated allegations by then-Deputy General Counsel Lara Daly-Sims that she and then-General Counsel Mike McKenna drank alcohol and went to strip clubs during work hours.
LINK:
Elizabeth Fischmann Named NCUA Chief Ethics Counsel
(Dec. 11, 2020) Texas has a “continuing need” for the state credit union department and it should be sustained for another 12 years, according to a recommendation reached this week by the commission that advises the Lone Star State legislature on whether state agencies are effective and should remain in operation.
NASCUS’ Lucy Ito praised the decision, not only for the decision to retain the Texas Credit Union Department as a separate agency within state government, but also for the state level accountability for regulatory agencies.
In a report issued with the recommendation, the Texas Sunset Advisory Commission asserted that the state “benefits from having a strong credit union industry” and the current organizational structure of the department “is the most efficient and effective approach to regulation at this time.” The commission is charged with periodically evaluating state agencies and departments, and with issuing recommendations for change (if any) to the agency and state legislature.
The report was prepared in advance of today’s decision. The Texas Credit Union Department (headed by Commissioner John J. Kolhoff) was created in 1969 and has been an independent agency since. In 2009, the agency earned “self-directed semi-independent (SDSI)” status, authorizing it to set its own fees, budgets, and performance measures independent of the legislative appropriations process.
As required by state law, the commission examined whether the department’s functions are still needed and whether the current organizational structure is most effective and efficient. The commission may also develop a package of changes (if any) to bring to the Texas legislature, according to the commission’s website.
Notably, the report states that the Texas legislature has considered nine times over the last four decades moving the Credit Union Department to the state’s Finance Commission (which oversees three agencies supervising banks, savings banks and other types of financial institutions and occupations).
“As the recommendation by the Texas Sunset Advisory Commission stated, the Texas Credit Union Department efficiently met its regulatory mission over the sunset period and transferring the department to another agency within state government ‘would have no benefit at this time and the current organizational structure is the best option.’ This report also acknowledges the commission’s belief that credit unions are unique financial institutions deserving of their own, independent regulator,” Ito said. “Additionally, state credit unions welcome the review by the state of its regulatory structure to ensure accountability of the regulator and reassurance that its mission is being carried out.”
Ito pointed out that other states, including Colorado, have similar review and sunset commissions. Colorado is every 10 years, Texas every 12. In fact, the Colorado Division of Financial Services will undergo sunset review in 2022-24.