NCUA 2023 Annual Regulatory Review

June 30, 2023

Office of the General Counsel
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314

Re: NASCUS Comments on NCUA 2023 Annual Regulatory Review

To Office of the General Counsel,

The National Association of State Credit Union Supervisors (NASCUS)[1] submits the following comments in response to the National Credit Union Administration’s (NCUA’s) request for comments on the 2023 Regulatory Review.[2] NASCUS appreciates the opportunity to provide NCUA feedback and we commend NCUA for inviting recommendations for improvement of the agency’s regulations.

NASCUS comments in detail follow below.

Administrative Issues Related to the 2023 Regulatory Review

The 2023 Regulatory Review includes Part 741 which incorporates, by reference, NCUA’s federal credit union (FCU) rules applicable to FISCUs. For FISCU stakeholders, recommendations on reducing regulatory burden under § 741 must include passing through the § 741 provision to address the substantive rules that are cited in § 741, though located elsewhere in NCUA’s regulations. It has long been NASCUS’s practice to address the numerous § 741 cross references during the Regulatory Review year in which Part 741 is reviewed.[3]

Consolidation of NCUA Title II Insurance Rules

The current organization of NCUA’s rules for FISCUs unnecessarily complicates compliance for both credit unions and examiners because many substantive provisions applicable to FISCUs are scattered throughout NCUA’s federal credit union rules and incorporated by reference in Part 741. NCUA’s practice of reference by incorporation is cumbersome and confusing. At a time when credit unions and regulators acknowledge the ever-increasing regulatory burden, reorganizing and streamlining its Rules and Regulations for ease of understanding could have an outside positive impact for credit unions.

NCUA should reorganize its rules to consolidate and co-locate all National Credit Union Share Insurance Fund (SIF) rules for FISCUs in one section (or series of consecutive sections). Reorganizing the rules in this manner would provide significant regulatory relief to credit unions without increasing risk to the SIF.

As we have noted in previous comments submitted to NCUA, FISCU rules are further complicated by the fact that § 741 often requires compliance with “applicable” provisions found elsewhere in NCUA’s rules.  Unless the adjective “applicable” is mere surplusage, this means that some provisions of the referenced rule apply to FISCUs whereas others do not. However, absent clear designation of the “applicable provisions,” the reader can only speculate how many applicable provisions there are, and what they might be.

As NCUA understands, scattering FISCU compliance obligations throughout NCUA’s Rules and Regulations comingled with hundreds of unrelated provisions that do not apply is burdensome, confusing, and ultimately counter-productive to compliance. Historically, NCUA has initiated steps to alleviate such a burden for FCUs. NCUA reorganized and co-located several FCU lending provisions, stating:

Having the various maturity limits spread among numerous sections of the NCUA’s regulations, often separated by large amounts of regulatory text unrelated to maturities, can be confusing to a reader and makes it more difficult to understand the lending regulations. To remedy this, in the proposed rule, the Board proposed to make the NCUA’s loan maturity requirements more understandable and user friendly by identifying in one section (§ 701.21(c)(4)), including cross citations, and all of the maturity limits applicable to FCU loans.[4]

Considering that for FISCUs, virtually every one of NCUA’s applicable regulations is scattered in the same confusing manner as the FCU borrower limits NCUA remedied for FCUs, it is long past time NCUA co-locates and consolidates FISCU rules.

NCUA Should Initiate a Similar Review Policy for Guidance

In recent years, NCUA has made vast improvements in the presentation of supervisory guidance on the agency’s website. Stakeholders may now access various guidance by year, subject matter, and issuance type. In addition to the organizational improvements in presenting guidance that have been made, NCUA should develop a regular review of guidance as a companion to the annual Regulatory Review.

As NCUA aptly noted in the agency’s 2021 final rule on the Role of Supervisory Guidance, often regulations are not simple prescriptions that lend themselves to “right or wrong” determinations in the supervisory process.[5]   While not carrying the force of regulation or statute, supervisory guidance provides stakeholders crucial insight into how NCUA interprets compliance with regulation, and as such is just as critical to be regularly evaluated.

701.21(c)(8) – Compensation in Connection with Loans to Members and Lines of Credit to Members 

In 2019 NCUA issued an Advanced Notice of Proposed Rulemaking[6]  regarding §701.21(c)(8) and compensation in connection with loans to members.  Incentive-based compensation tied to loan production is a complicated matter requiring nuance to balance a financial institution’s need to offer competitive compensation packages for key staff on par and in line with prevailing industry standards with mitigating the risk of incentivizing bad loans or encouraging inappropriate risk-taking.

NASCUS continues to support rulemaking that would provide greater flexibility for credit unions to offer compensation packages for loan officers on par with the broader financial services sector.  Recognizing it may take several attempts to properly calibrate a loan compensation rule, we encourage NCUA to allow state rules regarding compensation practices to vary from NCUA’s. State regulators, most of whom have experience supervising financial services entities that utilize incentive-based compensation, are well positioned to administer prudent regulations that balance needed business flexibility with supervisory principles. Providing a diversity of approaches will allow NCUA and state regulators to evaluate different methods of balancing operational flexibility with risk mitigation. NCUA already provides a path for a state-specific rule exemption for parts of the federal lending rule, and we believe that exemption should be expanded to include the entire provision.

Ability of States to Obtain Exemption from Parts of the Federal Loan Policy Rule

Part 741.203(a) provides a partial exemption from NCUA’s loan policy rule. Specifically, states may seek an exemption from the §701.21(c)(8) prohibitions ”if the state supervisory authority…adopts substantially equivalent regulations as determined by the NCUA Board…”  To provide for meaningful regulatory and supervisory innovation, the “substantially similar” standard for a state exemption should be modernized and better calibrated to focus on material risk to the share insurance fund and not the proposed state rule’s “similarity” to the existing prohibition.

702 Subpart D – Subordinated Debt, Grandfathered Secondary Capital, and Regulatory Capital

Securities Offering Status

The NCUA has determined that subordinated debt notes issued under the subordinated debt rule fit the definition of a security[7].  We urge the NCUA to reconsider.

Consideration should be given to the successful history of LICU issuances of secondary capital as well as the unique nature of the credit union system. Absent demonstrable material risk, the NCUA should avoid imposing burdens on LICU secondary capital, or complex credit union subordinated debt, issuances that disadvantage credit unions compared to their bank peers.

The current rule applies disclosure requirements to credit union issuances of subordinated debt that mimic the requirements of the federal securities laws, even if the credit unions’ issuances to accredited investors would not be subject to such requirements under the securities laws themselves.

708a & §708b Bank Conversion and Mergers; and Mergers of Federally Insured Credit Unions

With respect to a FISCU, NCUA’s sole concern should be mitigating risk to the SIF. In the absence of any clear and compelling connection between the activity being regulated and risk to the SIF, NCUA should always defer to laws applicable to each state. While we appreciate that NCUA may have the statutory authority to regulate FISCU mergers, a more risk-focused approach to FISCU mergers is the more prudent course.

When two state-chartered credit unions merge, NCUA’s appropriate role is to ensure the continuing credit union is sufficiently capitalized and managed to absorb the merged credit union without posing a material risk to the insurance fund. If the continuing credit union is safe and sound, and risk to the SIF is minimized, NCUA’s role in a merger of FISCUs should be concluded. It is for the state regulators, as the prudential regulator, to evaluate governance issues related to their respective charters.

As we have noted on numerous occasions, there is abundant transparency in the state credit union system when it comes to compensation.[8]

Member-to-Member Communication Remains Problematic

The member-to-member communication component of the final rule remains problematic, overly burdensome, and unnecessary. It might help stakeholder evaluation of the efficacy of this rule were NCUA to publish data on the numbers of mergers completed since the implementation of the rule, the total number of members affected, and the total number of members that availed themselves of the portal.

The multitude of mailings the NCUA requires also proves problematic and costly to FISCUs as many states have their own statutory notice and timing requirements for communications. NCUA should NOT require the states, when two FISCUs are merging, to follow the Agency’s notice and timing requirements on top of their own statutory requirements. This imposes double the costs of mailings to the respective institutions and confusion for the membership receiving the communications. We are unconvinced that the difference between NCUA’s timing and a state timing requirement represents any serious risk to the share insurance fund.[9]

To reiterate, NASCUS and state regulators acknowledge, and welcome, NCUA’s role in FISCU mergers as the administrator of the SIF. However, the overreach of the 2018 Merger Rule not only weakens the dual chartering system, but it has also caused real-life complications involving the mergers of FISCUs that continue to frustrate state regulators. Whether the problems arise from a mismatch in state and NCUA timeframes for notices, state and NCUA assessment of the need to pay out net worth to the merging credit union, or any other governance-related issue, the root cause is the same: NCUA’s rule reaches far beyond reasonable safety and soundness risks.

Part 712 Credit Union Service Organizations (CUSOs)

NCUA’s CUSO rule applies in part to FISCUs by reference in § 741.222. Specifically, NCUA’s rules apply to FISCUs only with respect to the need to maintain corporate separateness between a FISCU and its CUSOs, the requirement for FISCUs to contractually obligate their CUSOs to submit annual reports to NCUA, and necessity of NCUA and state regulators access to a CUSOs’ books and records.[10] The balance of Part 712 prescribes FCU CUSO activities and the relationship between the FCU and its CUSOs. CUSO wholly owned by FISCUs (either singularly or together) are not bound by NCUA’s limitations on activities or “services to members” nor are the FISCUs bound by § 712 lending or investment limitations. However, any FCU involvement with a CUSO subjects the CUSO to FCU CUSO restrictions.[11]

The fact that FISCU CUSOs are predominantly regulated by state law is appropriate and strongly supported by NASCUS. CUSOs represent an example of dual chartering at work, where dual parallel but distinct credit union systems allow for innovation in both services and supervision.

We offer two recommendations for enhancement of NCUA’s CUSO rule.

De minimis FCU investments in FISCU CUSOs

Recently, NCUA proposed a change to corporate credit union CUSO investment rules that would allow corporate credit union to make a de minimis investment into a natural person credit union CUSO without that CUSO being designated a corporate credit union CUSO pursuant to Part 704.[12] In the Supplemental Material accompanying the proposal, NCUA noted that making that change would benefit the system by enhancing the ability of credit unions to pool resources to pursue innovation without materially increasing risk to the SIF. NASCUS agrees and we wrote in support of NCUA’s proposal.

We recommend NCUA consider a similar amendment to Part 712 that would allow FCUs to make a de minimis investment in a FISCU owned CUSO without the CUSO becoming subject to the FCU CUSO provisions of § 712. Modernizing Part 712 in this manner would benefit FCUs by allowing them to participate with FISCU CUSOs that might be engaged in activities different from those typically permitted for a FCU CUSO. FISCUs could benefit from being able to partner with FCUs without having to surrender the benefits of the state charter powers and authorities of their CUSOs.[13]

CUSOs are Functionally Supervised by NCUA and Should be Exempt from MLO Licensing

NCUA has consistently stated that it lacks supervisory authority over CUSOs sufficient to confer “registration” status upon mortgage loan originators (MLOs) pursuant to the 2008 Safe Licensing Act.[14]  We note that NCUA dictates the corporate relationship between CUSOs and their credit union owners, requires CUSOs submit to NCUA access to the CUSO’s books and records, and requires CUSOs register with NCUA and annually submit data.[15]

In view of these NCUA requirements, we recommend NCUA reconsider its finding that it lacks sufficient regulatory control over CUSOs to warrant registration of CUSO MLOs.

Part 713 Fidelity Bond and Insurance Coverage for Federal Insured Credit Unions

In July 2019, NCUA published a final Fidelity Bond rule.[16] The final rule further extended the application of the rule to FISCUs, mandated a board signature on bond contracts, created a sunset of NCUA approval of bond forms, and mandated bond contracts contain an extension of discovery provisions. NASCUS shared its concerns with the final rule in its comment letter filed in 2019.[17]

NASCUS continues to believe the changes finalized in 2019 were unnecessarily far reaching and in some instances, confusing. For example, the new requirement for a board signature on the bond contract confused stakeholders who were unclear if the board member must sign the bond contract every year after reviewing bond coverage or only upon renewal of the contract.

We recommend NCUA revisit the requirement that a board member individually sign the bond contract and at most consider documentation of an annual board approval requirement. NASCUS remains unconvinced this change was either necessary or will prove particularly effective in solidifying bond claims.

We also note that § 741.201 requires FISCUs comply with §§ 713.3, 713.5, and 713.6. There is no cross reference to § 713.2 requiring the board signature, yet NCUA has asserted that this signature requirement does apply to all federally insured credit unions. Either this is yet another example of the insufficiency of NCUA’s practice of incorporation by reference, or there are legitimate questions as to whether §713.2 is binding upon FISCUs.

Part 722 Appraisals

The appraisal industry is in need of significant modernization. As Congress, and the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE) works to address appraisal bias and modernization of the overall appraisal industry, NASCUS asks the NCUA to ensure credit unions can continue to serve their membership and proceed with extensions of credit in a fair and efficient manner, without adding undue burden and limiting products and services offered.

Part 723 Member Business Loans

NASCUS has no specific recommendations at this time.  However, NASCUS strongly encourages NCUA to ensure a viable path for the implementation of alternative commercial lending rules developed by state regulatory agencies and specific to the economic and community environments over which they remain the prudential regulator.  Recognition of appropriate alternatives that may differ from the NCUA is necessary to ensure the strength of the dual charter system while mitigating risk to the SIF.

Part 741 Requirements for Insurance

As discussed above, our primary concern with § 741 is the confusing and inconsistent structure of NCUA’s rules with respect to FISCUs. Rules for FISCUs should be co-located. In addition, NASCUS recommends NCUA consider changes to § 741, and its underlying rules for FISCUs as follows:

The Subpart Headings of Part 741 are Misleading

Part 741 is divided into two subparts, titled “Subpart A Regulations that Apply to Both Federal Credit Unions and Federally Insured State-Chartered Credit Unions and That Are Not Codified Elsewhere in NCUA’s Regulations” and “Subpart B Regulations Codified Elsewhere in NCUA’s Regulations as Applying to Federal Credit Unions That Also Apply to Federally Insured State-Chartered Credit Unions.” However, in Subpart A, there are numerous cross references to regulations codified elsewhere in NCUA’s rules that are being applied to state charters (in other words, Subpart B rules). For example, § 741.3 contains multiple cross references to other provisions in NCUA rules. And § 741.3 in not unique in this within Subpart A.

NCUA should correct these misnomers.

Paragraph 741.3(a)(2) requires FISCUs to maintain special reserves for certain nonconforming investments (investments not permitted to FCUs).  NASCUS questions the ongoing need for special reserves for nonconforming investments given current GAAP accounting requirements for valuing investments and the inherent supervisory discretion to require reserves for investments carrying material risk. We recommend the special reserves provision be deleted.

Subsection 741.3(e) states “The credit union must not perform services other than those which are consistent with the promotion of thrift and the creation of a source of credit for its members, except as otherwise permitted by law or regulation.”  We do not believe that this is intended to be an absolute prohibition, because such a prohibition would reflect a misunderstanding of 12 U.S.C. §1781(c)(1)(E), which requires NCUA to consider whether an applicant for share insurance is a cooperative association organized for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes.  An applicant can satisfy these statutory requirements and yet provide other services as well.  Other services should be viewed as consistent with the §1781(c)(1)(E), statutory requirement if, for example, they help the credit union improve “the convenience and needs of the members to be served by the applicant, as required by 12 U.S.C. §1781(c)(1)(F).  Unless a service to members is performed in a manner that impairs the safety and soundness of the credit union and thus threatens its ability to comply with both 12 U.S.C. §1781(c)(1)(E) and 1781(c)(1)(F), the service should be allow so long as it is authorized under state law.  (The powers and authorities of a FISCU is solely a matter of state law.)  We recommend that subsection 741.3(e) be deleted or revised to prevent misunderstanding.

Subsection 741.8(a) requires NCUA’s pre-approval before a FISCU purchases loans from a privately insured credit union, a bank, or a non-depository entity. This provision is far too prescriptive and inserts the NCUA Regional Director into the role of credit union management. NCUA and state regulators have sufficient supervisory tools to respond to a credit union’s unsafe and unsound practices. To require a financial institution to seek permission before making the simple business decision to purchase a loan from another financial institution or non-depository lender hampers business efficiency and is an unnecessary regulatory burden. NASCUS recommends this provision should be deleted.

Section 741.206 applies NCUA’s corporate credit union rule, Part 704, to state-chartered corporate credit unions. NCUA recently published proposed changes to Part 704 for which NASCUS submitted supportive comments.[18]  Beyond the scope of NCUA’s March 2020 Notice for Comment, there are several additional, and vital, changes needed for the corporate system.

We recommend the following changes to § 741.206 and the provisions application of Part 704:

Restoration of Dual Chartering

While the regulatory and supervisory reaction to the Great Recession and the severe distress of some (not all) corporate credit unions is understandable, it is time to re-evaluate all of Part 704 and, particularly relevant to this Notice for Comment, incorporate directly into § 741.206 greater flexibility for state rules to provide flexibility for state-chartered corporate credit unions. A return to flexibility would benefit the entire credit union system in general, and the corporate system in particular, by reintroducing a long absent regulatory and supervisory laboratory of innovation to this critical sector of the credit union system.

Limited Non-CUSO Investment Authority

Section 741.206 should provide state regulators the flexibility to empower corporate credit unions to hold limited equity investments in non-CUSO entities. These equity investments should not be permitted for speculative gain, but rather to allow corporate credit unions to access a “seat at the table” for technological and financial services innovation taking place outside of the credit union realm.

Enhanced Borrowing Authority

Section 741.206 should be amended to allow state regulators to consider providing state-chartered corporate credit unions a twelve-month secured borrowing rather than the current 180-day limit. Corporate credit union balance sheets are cyclical.  Recognizing this fact and allowing state-chartered corporate credit unions to manage secured borrowings over a full balance sheet cycle will enhance the system’s ability to respond to stress.

Board Governance

Section 741.206 also should be amended to allow state regulators to provide state-chartered corporate credit unions greater flexibility in board eligibility requirements. Corporate governance is a matter of state law. We remain unconvinced that NCUA’s prescription on corporate board eligibility mitigates any material risk. We note in fact that NCUA is now considering expanding board eligibility (which we support) in a manner long advocated by NASCUS. We believe it can safely be expanded further.

Section 741.208 incorporates by reference NCUA’s prescriptive rules related to mergers and conversions. The conversion of a state-chartered credit union to a non-credit union charter, and the mergers of two state-chartered credit unions into a single credit union entity are, from a governance perspective, matters for state law and regulation. We recommend NCUA amend § 741.208 to provide for states to enact state specific conversion and merger rules. NCUA’s state-chartered credit union specific conversion or merger rules should narrowly define SIF related safety and soundness requirements, with all remaining corporate governance or member communication requirements rightfully reserved for the state chartering authority.

Section 741.214 incorporates by reference NCUA’s Part 748, regarding reports of crimes and catastrophic acts, and BSA compliance.  Paragraph 748.1(c)(4) requires management to notify the board of directors of any SAR filed, and NCUA has interpreted this provision to require monthly notification. While FCUs are required to have monthly board meetings, states vary in requirements related to frequency of board meetings. NCUA should recognize that some FISCUs hold board meetings every other month, which in our view would be the appropriate time for SAR reporting to the board of directors. We recommend § 741.206 be amended to provide FISCUs may report SAR filings to the board of directors quarterly (or at least at every board meeting).

John J. Kolhoff,
Senior Vice President of Policy and Supervision

[1] NASCUS is the professional association of the nation’s 46 state credit union regulatory agencies that charter and supervise 1,986 state credit unions. NASCUS membership includes state regulatory agencies, state-chartered and federally chartered credit unions, and other important stakeholders in the state system. State-chartered credit unions hold over half the $2.2 trillion assets in the credit union system and are proud to represent nearly half of the 136.5 million credit union members.

[2] Available at

[3] NCUA has responded to our Part 741 related recommendations by characterizing cross referenced regulations as beyond the scope of that year’s Regulatory Review.[3]  We respectfully disagree and ask NCUA to expand on its conclusion that providing comments on regulatory requirements applied to FISCUs by Part 741 are beyond the scope of review when Part 741 is a subject of the Regulatory Review in question.

[4] NCUA Final Rule, Loans to Members and Lines of Credit to Members, 84 Fed. Reg. 57, at 10972 (March 25, 2019).

[5] The Role of Supervisory Guidance, 86 Fed. Reg. 21, 7951 (February 3, 2021).

[6] 84 FR 16796, (April 23, 2019).

[7] Fed. Reg. Vol. 86, No.34, p.11063

[8] All FISCUs must complete annual Internal Revenue Service Form 990 filings. Part VII of those filings is public and requires FISCUs to disclose any compensation paid to directors and officers; the compensation paid to “key employees” (employees earning more than $150,000.00 in reportable compensation; and “highly paid” employees (the top 5 employees earning more than $100,000.00 in reportable compensation).

[9] Much of the rationale behind the NCUA’s timing requirements is for members to provide comments on the proposed merger, however, a review of NCUA’s dedicated website for comments on proposed mergers, identifies an immaterial number of comments on mergers since the rule was finalized in 2018. This begs the question as to whether this is even necessary given the amount of burden it has imposed upon merging credit unions, particularly mergers between two FISCUs.

[10] See 12 C.F.R §§ 712.2(d)(2)(ii), 712.3(d), 712.4, and 712.11(b) and (c)

[11] 12 C.F.R. 712.3.

[12] Corporate Credit Union, 85 Fed. Reg. 60, at 17288 (March 27, 2020).

[13] While not germane to the 2023 Regulatory Review, NASCUS also encourages NCUA to consider allowing de minimis equity investments in non-CUSOs for purposes of participating in technological innovation.

[14] Secure and Fair Enforcement for Mortgage Licensing Act of 2008, Title V, Housing and Economic Recovery Act, Pub. L. No.110-289, 122 Stat. 2659 (July 30, 2008).

[15] See 12 C.F.R. Part 712, Credit Union Service Organizations, and 12 CFR Part 741, Requirements for Insurance. For a complete discussion, see 78 Fed. Reg. 72537 (Dec. 3, 2013). For more information about the CUSO rule, see NCUA Letter to Credit Unions 13-CU-13, Changes to NCUA Regulations related to Credit Union Service Organizations, issued in November 2013, and 14-CU-07, Contractual Agreements with Credit Union Service Organizations, issued in June 2014.

[16] Fidelity Bonds, 84 Fed. Reg. 142, at 35517 (July 24, 2019).

[17] NASCUS Comments on Notice of Proposed Rulemaking: Fidelity Bonds (January 22, 2019).

[18] Corporate Credit Union, 85 Fed. Reg. 60, at 17288 (March 27, 2020). See also NASCUS – Comments on Proposed Rule Corporate Credit Unions (RIN 3133-AF13) (July 27, 2020).