CFPB Bulletin 2020-01

March 2020

Responsible Business Conduct: Self-Assessing, Self-Reporting, Remediating and Cooperating

In 2013, the Bureau issued a Bulletin that identified several activities that individuals/businesses could engage in that could prevent and minimize harm to consumers, referring to these activities as “responsible conduct.” The Bureau is issuing this updated Bulletin to clarify its approach to responsible conduct and to reiterate the importance of such conduct.

The Bureau’s focus is on building a culture of compliance among entities, in order to minimize the likelihood of a violation of Federal consumer financial law and thereby prevent harm to consumers.  When a violation of law does occur, swift and effective actions taken by an entity to address the violation can minimize resulting harm to consumers.  Specifically, an entity may self-assess its compliance with Federal consumer financial law, self-report to the Bureau when it identifies likely violations, remediate the harm resulting from these likely violations, and cooperate above and beyond what is required by law with any Bureau review or investigation.

The Bureau seeks to encourage responsible conduct.  Accordingly, if an entity meaningfully engages in responsible conduct, the Bureau intends to favorably consider such conduct, along with other relevant factors, in addressing violations of Federal consumer financial law in supervisory and enforcement matters.  The Bureau principally considers four categories of conduct when evaluating whether some form of credit is warranted in an enforcement investigation or supervisory matter: self-assessing, self-reporting, remediating and cooperating.  These categories are discussed in more detail below.

Additionally, other factors the Bureau considers in determining how to resolve violations of Federal consumer financial law include, without limitation, (i) the nature, extent, and severity of the violations identified and any associated consumer harm; (ii) an entity’s demonstrated effectiveness and willingness to address the violations; and (iii) the importance of deterrence, considering the significance and pervasiveness of the potential consumer harm.

Self-Assessing:

This factor, also described as self-monitoring or self-auditing, reflects a proactive commitment by an entity to use resources for the prevention and early detection of violations of Federal consumer financial law. Below is a list of questions the Bureau intends to consider in determining whether to provide favorable consideration for self-assessing activity including:

  • What resources does the entity devote to compliance? How robust/effective is its compliance management system? Is it appropriate for the size and complexity of the entity’s business?
  • Has the entity taken steps to improve its compliance management system when deficiencies have been identified either by itself or external regulators? Did the entity ignore obvious deficiencies in compliance procedures? Does the entity have a culture of compliance?
  • Considering the nature of the violation, did the entity identify the issue? What is the nature of the violation or likely violation and how did it arise? Was the conduct pervasive or an isolated act? How long did it last? Did senior personnel participate in, or turn a blind eye toward, obvious indicia of misconduct?
  • How was the violation detected and who uncovered it? If identified by the entity, how did the entity identify the issue (e.g. from customer complaints, audits or monitoring based on routine risk assessments or whistle blower activity?) Was the identification the result of a robust and effective compliance management system including adequate internal audit, monitoring and compliant review processes? Was identification prompted by an impending exam or an investigation by a regulator?
  • What self-assessment mechanisms were in place to effectively prevent, identify or limit the conduct that occurred, elevate it appropriately, and preserve relevant information? In what ways, if any, were the entity’s self-assessing mechanisms particularly noteworthy and effective?

Self-reporting:

This factor substantially advances the Bureau’s protection of consumers and enhances its mission by reducing the resources it must expend to identify violations and making those resources available for significant matters.  Prompt self-reporting of likely violations also represents concrete evidence of an entity’s commitment to responsibly address the conduct at issue.  Below is a list of questions the Bureau intends to examine in determining whether to provide favorable consideration for self-reporting of likely violations of Federal consumer financial law including:

  • Did the entity completely and effectively disclose the existence of the conduct to the Bureau, to other regulators, and, if applicable, to self-regulatory organizations? Did the entity report any additional related misconduct likely to have occurred?
  • Did the entity report the conduct to the Bureau without unreasonable delay? If it delayed, what justification, if any, existed for the delay? How did the delay affect the preservation of relevant information, the ability of the Bureau to conduct its review or investigation, or the interests of affected consumers?
  • Did the entity proactively self-report, or wait until discovery or disclosure was likely to happen anyway, for example due to impending supervisory activity, public company reporting requirements, the emergence of a whistleblower, consumer complaints or actions, or the conduct of a Bureau investigation?

Remediating:

 When violations of Federal consumer financial law have occurred, the Bureau’s remedial priorities include obtaining full redress for those injured by the violations, ensuring that the entity who violated the law implements measures designed to prevent the violations from recurring, and when appropriate, effectuating changes in the entity’s future conduct for the protection and/or benefit of consumers. Below is a list of questions the Bureau intends to examine in determining whether to provide favorable consideration for remediation activity regarding likely violations of Federal consumer financial law including:

  • What steps did the entity take upon learning of the violation? Did it immediately stop the violation? How long after the violation was uncovered did it take to implement an effective response?
  • What steps did the entity take to discipline the individuals responsible for the violation and to prevent the individuals from repeating the same or similar conduct?
  • Did the entity conduct an analysis to determine the number of affected consumers and the extent to which they were harmed? Were consumers made whole through compensation and other appropriate relief, as applicable? Did affected consumers receive appropriate information related to the violations within a reasonable period of time?
  • What assurances are there that the violation (or a similar violation) is unlikely to recur? Did the entity take measures, such as a root-cause analysis, to ensure that the issues were addressed and resolved in a manner likely to prevent and minimize future violations? Similarly, have the entity’s business practices, policies and procedures changed to remove harmful incentives and encourage proper compliance?

Cooperating:

Cooperating relates to the quality of an entity’s interactions with the Bureau after the Bureau becomes aware of a likely violation of Federal consumer financial law, either through an entity’s self-reporting or the Bureau’s own efforts. Below is a list of questions the Bureau intends to examine in determining whether to provide favorable consideration for cooperating in a Bureau matter including:

  • Did the entity cooperate promptly and completely with the Bureau and other appropriate regulatory and law enforcement bodies? Was that cooperation present throughout the course of the review and/or investigation?
  • Did the entity take proper steps to develop the facts quickly and completely and to fully share its findings with the Bureau? Did it undertake a thorough review of the nature, extent, origins, and consequences of the violation and related behavior? Who conducted the review and did they have a vested interest or bias in the outcome? Were scope limitations placed on the review? If so, why and what were they?
  • Did the entity promptly make available to the Bureau the results of its review and provide sufficient documentation reflecting its response to the situation? Did it provide evidence with sufficient precision and completeness to facilitate, among other things, appropriate actions against others who violated the law? Did the entity produce a complete and thorough written report detailing the findings of its review? Did it voluntarily disclose material information not directly requested by the Bureau or that otherwise might not have been uncovered? Did the entity provide all relevant, non-privileged information and make assertions of privilege in good faith?
  • Did the entity direct its employees to cooperate with the Bureau and make reasonable efforts to secure such cooperation? Did it make the most appropriate person(s) available for interviews, consultation, and/or sworn statements?

The Bureau notes that it intends for this guidance to encourage entities subject to the Bureau’s supervisory and enforcement authority to engage in more “responsible conduct” as defined within the guidance. The bulletin can be found here.

 

 

 

 

20-RA-02 Federal Reserve Board Issues Rule Allowing Credit Unions to Remove the Monthly Limit on Savings Withdrawals

May 2020

NCUA has issued guidance to credit unions on issues related the Federal Reserve’s changes to transfer limits under Regulation D. The Federal Reserve has issued an Interim Final Rule (IFR) amending Regulation D by removing the 6/month limit on transfers from savings deposits. Credit unions may now suspend enforcement of the limit immediately and permit members to make unlimited withdrawals and transfers from their savings deposits. The IFR became effective on April 24, 2020. The Federal Reserve also published FAQs that will be updated as needed.

In addition to the changes made by the IFR, the Federal Reserve had issued an earlier interim rule reducing reserve requirement ratios to 0% effective March 26, 2020.

It is up to the credit union whether to waive the transaction limit as now permitted by the IFR: it is not mandatory. Credit unions may also use their discretion to decide how they want to classify savings accounts IF they choose to waive the limit: credit unions MAY reclassify them as transaction accounts OR continue to classify them as non-transaction accounts even with the limits waived.

Credit unions should be aware of the impact of this interim final rule on account agreements and related matters.

Letter to Credit Unions 20-CU-13 Working with Borrowers Affected by the COVID-19 Pandemic

April 2020

On April 7, 2020, federal regulators issued a revised interagency statement on loan modifications and reporting related to COVID-19 and the CARES Act. NCUA issued LTCU 20-CU-13 to provide guidance for credit unions working with borrowers experiencing financial hardship as a result of the COVID-19 pandemic.

Noting that credit unions need to consider appropriate strategies for each member and whether members need new funds or modifications of existing loans, NCUA emphasizes credit unions must also continue to operate in a safe and sound manner. NCUA’s guidance discusses several options for working with distressed members:

New Funds to Borrowers

  • Emergency Small-Dollar, Unsecured Loans – Intended to provide rapid shot term cash flow. Typically. $5k or less, 90-dya grace period and 2-3 year maturities.
  • SBA’s Paycheck Protection Program and Economic Injury Disaster Loan – Special programs offered with 100% SBA guaranteed and eligible for forgiveness of the entire loan.
  • Payday Alternative Loans (PALs) I and II– NCUA PALS I and II small dollar loan programs with maximum loans of $1K or 2K respectively and 6-12 month maturities. See § 701.21(c)(7).
  • Increased Revolving Credit Limits – Increasing credit lines for credit cards, home equity lines, and other revolving credit products.
  • Temporary Loan Modifications
    • Credit unions should comply with federal & state consumer financial protection rules, including fair lending laws, and provide accurate disclosures for all loan modifications. NCUA notes the following:
  • CARES Act Forbearance – Provides forbearance for federally backed transactions for 180 days (with an option for an additional 180 days) with no additional fees, penalties, or interest beyond contractual payments. The law also provides for a moratorium on foreclosures of these loans.
  • Payment Forbearance – A credit union may allow a borrower to defer monthly payments, w/an agreement to repay missed principal & interest at a later date.
  • Waiving Late Payment or Modification Fees – Waiving fees can prevent additional increases to a borrower’s debt as fees are often added to loan balances.
  • Interest-only Payments – This strategy results in lower payments for a defined period while preventing negative amortization. However, borrower’s payment would increase after the interest-only period.
  • Reducing the Interest Rate – Provide temporary relief by reducing the interest for a defined period.

NCUA reminds credit unions to consider the borrower’s ability to repay the debt at the end of the temporary modification period, especially if the modification will result in higher payments or a balloon payment.

  • Permanent Loan Modifications
    • NCUA notes the following strategies for permanently modifying or refinancing existing loans:
  • Consolidating Loans– Combining multiple loans, especially with an improved interest rate or extended amortization, could lower payments for a borrower.
  • Extending the Maturity Date– While this strategy can lower payments for a borrower, credit unions should consider whether the value of any collateral would remain sufficient through the extended term.
  • Reducing the Interest Rate – Reducing the interest rate can provide relief to a borrower by lowering their payment without extending the loan term.
  • Forgiving Principal – This would cause a loss to the credit unions and should generally be a last-resort concession, typically used only in cases where a borrower has negative equity in the property and a financial impact analysis indicates this modification appears favorable over foreclosure action.
  • Restructuring into A-B Notes – Generally only used when analysis indicates foreclosure is not a better option for the credit union, credit unions can structure an “A” note with a loan amount that meets a borrower’s ability to repay the loan and a B note to be repaid when A note repayment is completed.
  •  Monitor and Report Loan Modifications
  • Credit union policies should:
    • address the use of loan workout strategies and outline risk management practices clearly define borrower eligibility requirements
    • set aggregate program limits
    • establish sound controls to ensure loan workout actions are structured properly
  • A credit union’s risk-monitoring practices for modified loans should:
    • be commensurate with the level of complexity and nature of its lending activities
    • maintain safe and sound lending practices
    • comply with regulatory reporting requirements

The metric for successful modifications is the performance of the loan after it has been modified. Losses should be promptly recognized. The program should include periodic reports to executives and directors on all modified loans. The periodic reports may include:

  • delinquencies and charge-offs
  • number & volume of modifications by loan type
  • first payment defaults
  • high loan-to-value and debt-to-income ratios
  • credit quality
  • number of times each loan has been modified
  • expected loss exposure

Credit union management must comply with regulatory reporting requirements and generally accepted accounting principles, as applicable. A credit union’s decisions related to loan modifications may affect regulatory reporting, including interest accruals, troubled debt restructurings (TDRs), and credit loss estimates.

Additional Information

Credit unions seeking additional information should reference the following sources:

    1. NCUA Letter to Credit Unions 20-CU-02, NCUA Actions Related to COVID-19
  1. NCUA Letter to Credit Unions 20-CU-06, Small Business Administration Loan Programs to Help Small Businesses and Members During the COVID-19 Pandemic
  2. NCUA Letter to Credit Unions, 10-CU-07, Commercial Loan Workouts
  3. NCUA Regulatory Alert 10-RA-13, Final Rule – Part 701, Short-term, Small Amount Loans
  4. NCUA Letter to Credit Unions, 09-CU-19, Evaluating Residential Real Estate Mortgage Loan Modification Programs
  5. NCUA Supervisory Letter 13-02, Examiner Review of Loan Workouts, Nonaccrual, and Regulatory Reporting of Troubled Debt Restructured Loans and NCUA Letter to Credit Unions, 13-CU-03, Supervisory Guidance on Troubled Debt Restructuring
  6. NCUA Letter to Credit Unions, 08-CU-20, Evaluating Current Risks to Credit Unions and the attached Supervisory Letter, Evaluating Current Risks to Credit Unions
  7. CFPB Guide to Coronavirus Mortgage Relief Options
Letter to Credit Unions 20-CU-12 Outreach Related to COVID-19 Impact

April 2020

NCUA issued this LTCU to notify credit unions about an NCUA outreach initiative in which NCUA examiners will be contacting credit unions between May 4 and May 18 to review a list of  32 primary questions (with some questions having follow-up sub-questions).

NASCUS note: NCUA should be working with state regulators to coordinate the information gathering. NASCUS is aware that in some cases many of these questions have already been asked by state agencies in their ongoing remote supervision efforts.

For example, NCUA’s outreach questions include information requests related to:

  • Credit union operational status
  • How has the credit union altered services such as drive-thru only, lobby status, and appointments?
  • Questions regarding % of CU staff still working
  • COVID impact on the credit union’s membership
  • Credit union liquidity
  • Is the credit union experiencing higher than average cash withdrawals?
  • What is the daily average cash withdrawal rate?
  • Deposit and ACH information
  • Question related to credit union borrowings and contingency funding plans
  • Performance metrics
  • Percentages of real estate and auto loans in forbearance
  • Percentage of unsecured loans in forbearance
  • Status of commercial loan portfolio
  • Participation in SBA or other programs
  • Information on collections staffing

NCUA notes that the agency has also been monitoring the effect of COVID-19 on credit unions through information provided by:

  • corporate credit unions
  • other financial service providers
  • other government agencies
Letter to Credit Unions 20-CU-11 Regulatory Treatment for Paycheck Protection Program Loans

April 2020

 NCUA issued LTCU 20-CU-11 to discuss the agency’s recently published interim final rule related to the SBA’s Paycheck Protection Program (PPP) loans and the Federal Reserve’s PPP Lending Facility (PPPLF) advances. The regulatory changes in NCUA’s interim final rule became effective on April 27, 2020. NCUA has also provided information on the PPP in LTCU 20-CU-06.

 PPP Loan Related Regulatory Changes

NCUA has made changes to its rules related how PPP loans are classified for regulatory capital and commercial underwriting purposes:

  • Part 702.104 was amended to include PPP loans as low-risk assets for purposes of calculating a credit union’s risk based net worth ratio. PPP loans will receive a zero-percent risk weight.
  • PPP loans have been excluded from the definition of commercial loans per 723.2 and therefore will not be subject to the enhanced underwriting and monitoring requirements for commercial loans and will not count toward the MLB cap.

 PPP Loans to Officials

Although SBA regulations generally prohibit lenders from making an SBA loan to an affiliate or an owner, the PPP loans are uniform for all borrowers, and the standard underwriting process does not apply. The SBA’s most recent interim final rule on the PPP loan program  appears to allow for loans to a business owned by a Director as long as the Director is not an employee or officer of the credit union. Federally insured state credit unions(FISCUs) must still comply with § 701.21(d)(5) concerning non-preferential treatment for loans and lines of credit to officials (applicable by reference in § 741.203).

  • PPP Loans to Non-Members

The Federal Credit Union Act prohibits FCUs from originating loans to non-members. FISCUs should look to state law.

 Background: Federal Reserve System’s PPP Lending Facility

 Complete information on the PPPLF is available on the Federal Reserve’s PPPLF website. The Federal Reserve will supply liquidity to participating financial institutions through term financing backed by PPP loans. Only SBA-guaranteed PPP loans that are originated by an eligible institution may be pledged as collateral for this special lensing facility.

  • Treatment PPP Loans Pledged to the PPPLF as Collateral for Calculating Net Worth

NCUA has amended § 702.2 to allow credit unions to exclude PPP loans pledged as collateral for a non-recourse loan that is provided as part of the PPPLF from the calculation of total assets for the purpose of calculating its net worth ratio.

Only PPP loans pledged to the PPPLF will be excluded from the net worth ratio calculation. Unpledged PPP loans will still be included in total assets for purposes of calculating the net worth ratio with a zero-percent risk weight for purposes of risk based net worth.

 Call Reports

Future NCUA Call Report instructions will include guidance on how to categorize PPP loans and advances obtained through the PPPLF on the Call Report.

NCUA will continue to update its own FAQs on its COVID-19 Information webpage.

NCUA Temporary Final Rule: Parts 722 & 741.203 Loan Participations FCU Eligible Obligations FCU Occupancy

Prepared by NASCUS Legislative & Regulatory Affairs Department
April 2020

 NCUA has published a Temporary Final Rule (TFR) making changes to NCUA’s loan participation rule for all federally insured credit unions (FICUs), federal credit union (FCU) eligible obligation rules, and FCU occupancy rules. NCUA is enacting these changes on a temporary basis to help FICUs remain liquid and otherwise operational during the COVID-19 crisis. Specifically, NCUA is making the following temporary changes, effective thru December 31, 2020:

  • raising the maximum aggregate amount of loan participations that a FICU may purchase from a single originating lender to the greater of $5 million or 200% of the FICU’s net worth (applies to federally insured state credit unions “FISCUs” by reference in § 741.203(b))
  • suspending limitations on the eligible obligations that a FCU may purchase and hold
  • tolling the FCU requirement to occupy credit union owned properties not being used for FCU business

The Temporary Final Rule proposed rule may be read here. There is NO COMMENT Period. The TFR is effective from April 21, 2020 through December 31, 2020.

Summary

  • Increased aggregated loan participation purchase threshold

Part 701.22(b)(5)(ii) (applied to FISCUs by reference in § 741.204) of NCUA’s rules limits the aggregate amount of loan participations that a FICU may purchase from any one originating lender to the greater of $5 million or 100% of the FICU’s net worth. NCUA promulgated the limitation to mitigate a FICU’s concentration risk. FISCUs could seek a waiver from the limitation from the NCUA RD and the state regulator.

In order to facilitate FICUs’ ability to manage the COVID-19 crisis, maintain operations, and maintain liquidity, NCUA believes it prudent to temporarily raise the cap. Under the temporary final rule, the aggregate limit below which a waiver is not required will be raised to the greater of $5 million or 200% of the FICU’s net worth.

After December 31, 2020, a FICU must return into compliance with the current limitation of the greater of $5 million or 100% of net worth by ceasing to purchase loan participations from the originating lender or requesting a waiver pursuant to the rule.

Regulatory relief for FCUs Only

 The following 2 changes made by NCUA only apply to FCUs.

  • Purchase, Sale, and Pledge of FCU Eligible Obligations

Part 701.23(b) of NCUA’s rules govern an FCU’s ability to purchase, sell, or pledge all or part of an eligible obligation of its members. The rule provides that an FCU may purchase an eligible obligation from any source, provided the FCU is empowered to grant the loan or the loan is refinanced within 60 days following its purchase so that it is a loan the FCU is empowered to grant. FCUs with a composite CAMEL rating of “1” or “2” can purchase eligible obligation from any FICU without regard to the member nexus. NCUA is now expanding that exception to include composite CAMEL “3” FICUs.

  • FCU Occupancy and Disposal of Acquired Premises

Part § 701.36(c) of the rules generally limits an FCU’s investments in fixed assets authorizes and provides that if an FCU acquires premises, including unimproved land or unimproved real property, it must partially occupy them ‘‘no later than six years after the date of acquisition. NCUA is temporarily tolling the regulatory mandated timeframes for an FCU to occupy premises. Any days that fall within the period commencing on April 21, 2020 and concluding at the close of December 31, 2020, shall not be counted for purposes of determining an FCU’s compliance with the regulatory time periods.

Letters to Credit Unions 20-CU-08 Enhancements to CLF Membership & Borrowing Authority

April 2020

NCUA’s LTCU 20-CU-08 provides credit unions information about changes to the Central Liquidity Facility (CLF) as a result of the passage of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The operations of the CLF are governed by Title III of the Federal Credit Union Act (FCUA) and § 725 of NCUA’s rules.

Legislative Changes to the CLF

The CARES Act made several temporary changes to Title III of the FCUA that will sunset on December 31, 2020:

  • The CARES Act increased the CLF’s borrowing capacity to 16x the subscribed capital stock and surplus (retained earnings) of the CLF.
  • The CARES Act temporarily provides NCUA authority to allow agents subscribe to CLF stock on behalf of a smaller subset of members rather than the existing requirement of a subscription for ALL members.
  • The CARES Act changed the definition of “liquidity needs” to include the needs of any credit union: allowing corporate credit unions to borrow for their own needs.
  • The CARES Act removed the prohibition against NCUA approving borrowing intended to “expand credit union portfolios,” giving NCUA more flexibility and discretion to approve loans for credit unions that have made a reasonable effort to first utilize primary sources of funding.

Regulatory Changes to the CLF

NCUA has issued an interim final rule making additional changes to the CLF. Some of the NCUA changes are temporary and some are permanent. NCUA has:

  • Permanently eliminated the 6-month waiting period for a new member to receive a loan – Under the new rule, new regular and agent members can borrow as soon as they complete the new member documents and pay the required capital stock amount.
  • Temporarily amended the waiting period for a credit union to terminate its CLF membership – A credit union seeking to withdraw from CLF membership anytime until December 31, 2020, may do so on 6 months written notice. Between December 31, 2020 and December 31, 2021, a credit union may withdraw immediately upon written notice. After December 31, 2021, the temporary termination provisions will expire, and a credit union could terminate its membership after 6 or 24 months under the pre-COVID existing rules.
  • Permanently eased collateral requirements – Under the new rule, the amount of collateral required for an advance will be determined from the CLF’s collateral margins table, published on the NCUA’s website. The required collateral percentages vary based on different types of assets which may result in lower collateral requirements in some cases.
  • Temporarily permitting an agent member to borrow for its own liquidity needs – Corporate credit unions may borrow from the CLF subject to the same creditworthiness and liquidity-need criteria as for all other members.

Complete information on the CLF is available on NCUA’s CLF webpage on the agency’s website.

NCUA Risk Alert: 20-Risk-01 Cybersecurity Considerations for Remote Work

April 2020

Common cybersecurity risks for remote workers include Malware attacks, Phishing and other social engineering attacks, and Advance Persistent Threat (APT) attacks.

NCUA issued Risk Alert 20-Risk-01 to remind credit unions of the need to ensure that employees working remotely adhere to sound cyber hygiene on their home networks, personal computing devices, and other internet-connected devices. Credit unions must exercise controls over remote work commensurate with the institution’s size and complexity and be prepared to respond to any incidents that may occur.

Preparing Employees to Prevent Security Incidents

Credit unions should be communicating with remote employees to verify that work is being done securely. To minimize the risk of a successful cyber attack on remote employees, credit union policies should address issues such as:

  • Ensuring that family members or others do not use employee’s designated work device and that employees keep devices physically secure;
  • Encrypting sensitive information, using strong encryption options for wireless systems, and implementing session time outs;
  • Ensuring employees are working with a user account and not an administrator or privileged account and establishing strong, unique passwords for all log-ins and devices on the employee’s home network;
  • Leveraging firewall capabilities available through internet service providers;
  • Updating software and removing unnecessary services and software;
  • Ensuring system and account logs are being collected and maintained

Responding to a Security Incident

Credit union policies for remote employees should address actions the employee should take if they suspect a cyber incident and what responses the credit union will take.

Cybersecurity Resources

Additional resources are available at:

NCUA Interim Final Rule: Part 725 Central Liquidity Facility

Prepared by NASCUS Legislative & Regulatory Affairs Department
April 2020

NCUA has published an Interim Final Rule (IFR) making changes to NCUA’s Central Liquidity Facility (CLF). The IFR makes implementing changes pursuant to temporary changes made to the CLF by § 4016 of  HR 748, the CARES Act. The CLF is governed by Title III of the Federal Credit Union Act (FCUA) and Part 725. Both federally and privately insured credit unions may access the CLF.

The CARES Act made 4 changes to Title III that all will sunset on December 31, 2020:

  • Increased the CLF maximum borrowing authority to 16 times stock and surplus
  • Permits corporate credit unions to borrow for their own needs
  • Provides greater flexibility and affordability to corporate credit unions to serve as agents by allowing smaller pools of stock subscription
  • Provides NCUA more flexibility in approving loans by eliminating the limitation on borrowing to expand portfolios

In addition, NCUA’s IFR also made the following 3 changes to the CLF:

  • Eliminated the 6-month waiting period for a new member to receive a loan
  • Expedited credit union’s ability to terminate its membership in the CLF
  • Eased collateral requirements for certain assets securing loans

The Interim Final Rule proposed rule may be read here. Comments are due to NCUA 60 days after publication in the Federal Register. As of April 24, 2020, the rule has not been published in the Federal Register.

Summary

NCUA is making changes to the CLF that will allow corporate credit unions to join the CLF directly in their own right for a temporary period  as well as changing the rules for subscriptions when a corporate credit union acts an agent for its natural person credit union members. The changes related to corporate credit unions will sunset on December 31, 2020. NCUA is also making changes to allow credit union joining the CLF to immediately seek an advance of funds. Currently, a credit union must be subscribed for 6 months before seeking an advance.

  1. Changes Related to Corporate Credit Unions

In accordance with the CARES Act, NCUA is amending the definition of “Liquidity needs” in § 725.2(i) to remove the words “primarily serving natural persons.” This change allows corporate credit unions to access the CLF directly for their own borrowing needs until December 31, 2020. In addition, § 725.17(b)(2) will be amended to make clear that a corporate may apply for a CLF advance for its own liquidity needs.

Should a corporate seek to borrow from the CLF for its own liquidity needs, § 725.4 is being amended to require the corporate subscribe to CLF stock in an amount equal to .5% the corporate’s paid-in and unimpaired capital and surplus.

In addition, NCUA will make cohering changes to Parts 725.18(a) and 725.19(b) to apply to agent loans the same creditworthiness and collateral requirements that currently apply to CLF advances to natural person credit union members.

Once the provision sunsets, a corporate agent may not request any additional CLF advances for its own liquidity needs and must continue to follow the terms of the borrowings outstanding.

NCUA is also changing the subscription requirement for corporate credit unions to act as agent for natural person credit unions. Currently, § 725.4(a)(2) requires the corporate credit union agent to subscribe to the capital stock of the CLF in an amount equal to .5%

of the paid-in and unimpaired capital and surplus of all its natural person credit union members (except those that subscribe to CLF stock directly or have designated another corporate as their agent). Under NCUA’s changes, the NCUA will designate the group of credit unions which are considered covered by the corporate credit union’s agency and that group will serve as the basis for calculating the subscription amount required for purchase. This implements the changes made by the CARES Act to § 1795c(b)(2) of the FCUA. This change also sunsets on December 31, 2020.

Upon the sunset of this modified agent provision, any corporate credit union that became an agent under this provision must, within one-year from the sunset date, either:

  • purchase CLF stock in accordance with the terms of whatever post sunset regulation is implemented; or
  • terminate its membership in the facility

NCUA specifically seeks comment on whether the one-year time frame is sufficient, or whether a longer or shorter timeframe is warranted.

  1. Regular Membership Requirements

NCUA is eliminating the current § 725.3 six-month waiting period on obtaining CLF advances for a credit union that becomes a regular member. Now a credit union that becomes a member of the CLF may immediately seek an advance from the facility.

Under the FCU Act and current § 725.6 a credit union member may terminate its membership in the after a specified notice period based upon the amount of subscription:

 

% of CLF Stock Held by Credit Union

 

 Notice Period
Less than 5% total CLF stock Membership terminates 6 months after giving written notice to NCUA
5% or more of total CLF stock Membership terminates 24 months after giving NCUA written notice

 

NCUA is enacting a temporary change to the waiting periods for terminating CLF membership.

 

The Board is amending the waiting periods for a credit union to terminate its membership in the CLF between publication of the rule in the Federal Register and January 1, 2022. The temporary termination rules will be as follows:

 

Between May 2020 and December 31, 2020

 Any credit union, regardless of its percentage of CLF stock ownership may terminate its membership on the sooner of 6 months written notice or on December 31, 2020
 

Between January 1, 2021 and December 31, 2021

 Any credit union “still a member” on December 31, 2020 may terminate its membership immediately upon notifying NCUA
 

After January 1, 2022

 CLF membership termination will revert to the pre-amendment 6 month and 24 month notice and waiting periods

 

NCUA is also changing the collateral requires for advances from the CLF. NCUA will publish a collateral table on its website. The collateral required will vary based upon the types of assets the member credit union has available to secure the advance. Depending on the types of assets held by a CLF member, this change by NCUA might ease the collateral requirements which in turn might result in a higher borrowing capacity for the credit union seeking an advance.

Currently, § 725.19(a) requires collateralization of 110% of all outstanding advances without regard to the nature of the assets being pledged.

NCUA Proposed Rule: Part 704  Corporate Credit Unions

Prepared by NASCUS Legislative & Regulatory Affairs Department
April 2020

 NCUA is proposing changes to Part 704, the Corporate Credit Union Rule. The rule applies to state-chartered corporate credit unions by reference in Part 741.206. This proposal represents the 4th revision to corporate credit union rules since the economic crisis of 2008.

NCUA’s proposal would:

  • Permit corporate credit unions to make de minimis investments in natural person credit union CUSOs without those CUSOs being regulated as corporate CUSOs
  • Expands the category of senior staff eligible to serve on a corporate’s board
  • Removes experience and independence requirements for the enterprise risk management officer
  • Establishes rules for corporate investment in subordinated debt of natural person credit unions
  • Reduces the time horizon of NII modelling from 2 years to 1 year
  • Create a new Appendix D to the listing all approved corporate CUSO services
  • Clarifies the prohibition against investments in collateralized debt obligations as applying to both loans and debt securities

The proposed rule may be read here. Comments are due to NCUA July 27, 2020.

** Note, the comment period was extended to July 27, 2020 in a subsequent filing.

 Summary

  • NCUA Proposes easing the limitations on corporate credit union CUSO investments

Part 704.11 governs corporate credit union CUSOs. A corporate credit union CUSO is defined as an entity that is 1) at least partly owned by a corporate credit; 2) primarily serves credit unions; 3) restricts its services to those related to the normal course of business of credit unions; and 4) is structured as a corporation, limited liability company, or limited partnership under state law.

There is no exception under § 704 for de minimis investments by a corporate credit union into another entity. If the corporate credit union invests, the entity is a corporate CUSO and must meet the other requirements of Part 704.11.

The proposed rule amends the definition of corporate CUSO to allow a corporate credit union to make a de minimis non-controlling investment in a natural credit union CUSO without the CUSO being deemed a corporate CUSO. NCUA cites several benefits to the credit union system from this rule change:

  • Natural person CUSOs have greater flexibility than corporate CUSOs which may better facilitate innovation, product, and service development
  • Corporate credit union participation in the natural person CUSO pool allows corporates to access innovative development while providing natural person credit unions a larger pool of investors and collaborators

 

  • NCUA will make conforming changes to § 704.2 Definitions and to References in § 704.5, § 704.6, and § 704.7

To recognize that corporate credit unions would be allowed to hold de minimis non-controlling investments in natural person credit union CUSOs, NCUA would expand and revise the CUSO definitions in § 704.2. The proposal defines a “Corporate CUSO” as a CUSO where:

  • a corporate owns 25% of the CUSOs stock or equity
  • the CUSO a consolidated CUSOSO
  • a corporate credit union has the power, directly or indirectly, to direct the CUSO’s management or policies
  • the aggregate corporate credit union ownership meets or exceeds 50% of the CUSO’s contributed equity, stock, or membership interests

NCUA would also add a definition for a “CUSO” to reflect that corporates might invest in a natural person credit union CUSO WITHOUT a controlling interest. Finally, the existing definition of “Consolidated Credit Union Service Organization” would be amended to include any CUSO whether a corporate CUSO or a natural person credit union CUSO.

Rule would replace the term corporate CUSO with CUSO to apply to both corporate and natural person credit union CUSOs for purposes of the credit risk management, investments, and lending provisions of the rule.

 

The proposal would create a new definition for “natural person credit union subordinated debt instrument” referring to any debt instrument issued by a natural person credit union pursuant to such rules for federally insured credit unions.

The proposal would change the defined term “collateralized debt obligation” to “collateralized loan or debt obligation,” to clarify that the prohibition applies to both loans and debt securities.

  • Part 704.11 would be Reorganized

The proposed changes to § 704.11 clarify that certain requirements apply to a corporate credit union’s investment in or lending to both a corporate CUSO and a natural person credit union CUSO while certain requirements apply only to either natural person CUSOs or corporate CUSOs.

Part 704.11(a) would be amended to make clear that the existing aggregate investment and loan limits apply to the aggregate of a corporate’s loans and investments to all CUSOs whether corporate or natural person.

Part 704.11(b) would require corporate credit unions comply with § 723.4 due diligence requirements

Part 704.11(c) would require corporate credit union investments in natural person credit union CUSOs comport to Part 712 as well. NCUA states that the corporate credit union’s investment in a FISCU’s CUSO would also be subject to § 712.

Part § 704.11(e) would designate any subsidiary of a corporate CUSO as a corporate CUSO and apply § 704 to all tiers of a corporate CUSO.

  • Part 704.19 Disclosure of Executive Compensation

Under the proposed rule, § 704.19 would require that the disclosure of certain employees’ compensation include BOTH compensation from a corporate CUSO and a natural person credit union CUSO. However while current § 704.11(g) requires a corporate CUSO to disclose compensation paid to any employees that are also employees of a corporate credit union lending to or investing in the CUSO, natural person credit union CUSOs will not be required under the Corporate Credit Union rule to disclose such information. Corporate credit unions would be responsible for getting this information from a natural person credit union CUSO.

  • Part 704.14 Corporate Credit Union Board Representation

Part 704.14 currently requires credit union representatives on the corporate’s board must hold the position of chief executive officer, chief financial officer, chief operating officer, or treasurer/manager at a member credit union. Under the proposal, NCUA would no longer expressly limit the corporate credit union board to the above stated positions. The proposed rule would require the credit union representative board members by any person in a senior staff position at a member credit union. The rule would list the above positions as examples and add two new positions to the list: chief information officer and chief risk officer.

  • Part 704.21 Enterprise Risk Management

Since 2011 § 704.21 has required corporate credit unions develop and follow an enterprise risk management policy, establish an enterprise risk management committee (ERMC) and include an independent risk management expert on that committee. The current rule included a prescriptive list of qualifications for the risk management expert as well as a requirement the expert be “independent” of the corporate credit union. NCUA no longer believes that it is necessary for prescriptive experience requirements and for the risk management expert to be independent of the corporate credit union. The proposed rule would require the enterprise risk management committee include a risk management expert who can report directly to the board of directors and whose experience is commensurate with the size and complexity of the corporate. In other words, the risk management expert may now be an insider. NCUA will evaluate the adequacy of a corporate credit union’s enterprise risk management practices through the supervisory process.

  • Natural Person Credit Union Subordinated Debt Instruments

Corporate credit unions may purchase subordinated debt instruments of natural person credit unions under a corporate credit union’s lending authority. The proposed rule does not explicitly state that a corporate credit union may purchase a natural person credit union subordinate debt instrument because NCUA believes corporate credit unions’ lending authority is currently sufficiently broad to include purchasing subordinated debt instruments.

Under the proposal, the revised definition of “Tier I Capital” would require corporate credit unions fully deduct the amount of the subordinated debt instrument from its tier 1 capital to ensure consistent treatment between investments in the capital of other corporate credit unions and natural person credit unions.

  • New Appendix D: Approved Corporate CUSO Activities

Current § 704.11 requires that a corporate CUSO agree to limit its services to brokerage services, investment advisory services, and other categories of services as preapproved by NCUA and published on NCUA’s Website. NCUA now proposes replacing the list on the agency’s website with a new Appendix D that would list all approved services and any conditional approvals. NCUA is not making any changes to the list, only republishing the list as part of the rule text.

 

  • Net Interest Income Modeling

 

Under current § 704.8, every quarter, a corporate credit union must perform net interest income (NII) modeling to project earnings in multiple interest rate environments for a period of no less than two years. Corporates are also subject to weighted average life limits for asset maturities of a maximum two years maturity. Because of the overlap of these two requirements, NCUA proposes to only require NII modeling for 1 year instead of two.

  • NCUA’s Request for Comments

NCUA is particularly interested in comments on proposed thresholds and definitions as well as specifically on the following:

  • Is the proposed definition of corporate CUSO appropriate? Does it capture the types of corporate credit union investments most likely to pose systemic risk and is 25% the proper threshold for designating a CUSO a corporate CUSO?
  • How do corporate credit unions structure their investment in CUSOs? Is it generally through stock? Contributed equity? Membership interests? Are there any types of typical ownership interests excluded from the proposed rule?
  • Can Corporates comply with annual disclosure compensation rules without receiving compensation information from the natural person CUSOs?
  • Should the rule prohibit corporate credit union investment is subordinated debt?
  • Is the definition of natural person credit union subordinated debt instrument appropriate?
  • Is the timeframe proposed for NII modeling appropriate?
Letters to Credit Unions 20-CU-10 Residential Appraisals Threshold Increase & Other COVID-19 Related Relief Measures

April 2020

NCUA issued LTCU 20-CU-10 to provide information on regulatory relief provided by 2 rules published in April related to residential real estate transactions. The guidance also provides information on additional appraisal relief provided by Fannie Mae, Freddie Mac, and other federal agencies in response to the disruptions of the real estate valuation process caused by the COVID-19 pandemic.

NCUA’s appraisal rules are established by Part 722 and Part 741.203.

Final Rule: Real Estate Appraisal Threshold

 The final rule increases the appraisal threshold for residential real estate from $250,000 to $400,000, bringing credit unions on par with the banking threshold. For residential real estate transactions of $400k or more, the new requires:

  • an appraisal from a state-certified appraiser if the transaction is complex
  • an appraisal from a state-licensed appraiser non-complex transactions

Appraisals must comply with the Uniform Standards of Professional Appraisal Practice (USPAP). Current USPAP standards allow for a desktop and exterior-only appraisals.

 For transactions below $400k, credit unions have the option of obtaining either an appraisal or a written estimate of market value. Written estimates of market value must:

  • be conducted by an individual who is 1) qualified to perform the valuation, and 2) independent of the transaction
  • contain a reliable estimate of the property’s market value supported by documentation, analysis, and a physical inspection
  • contain sufficient information for the CU to make a prudent credit decision

 Interim Final Rule: Deferment of Appraisals and Evaluations

The recently issued NCUA Interim Final Rule (IFR) allows credit unions to defer appraisals and written estimates of market value for transactions requiring such valuations for up to 120 days after closing. The IFR is intended to grant relief due the extraordinary circumstances of the COVID-19 outbreak and bring credit unions on par with the temporary rules for banks.

The IFR expires on December 31, 2020 and any transactions closing on that date would have to be appraised by April 30, 2021. The 120-day deferment applies to all residential real estate loans, and all commercial real estate loans except acquisition, development, construction loans. There is no limit on transaction size. NCUA stresses that credit unions will still be expected to underwrite real estate loans prudently.

If a credit union engages an appraiser to conduct a desktop or exterior-only appraisal, it should seek those services at the time of the loan rather than delaying the 120 days.

The Interagency Statement on Appraisal and Evaluation Flexibilities

On April 14, 2020, the NCUA and other banking agencies released an interagency statement on appraisal flexibility for FIs during the COVID-19 pandemic In addition to noting the USPAP guidelines allowing for non-physical inspection appraisals and NCUA’s relief (discussed above) the interagency guidance also notes that certain residential mortgages that qualify for sale to Fannie Mae and Freddie Mac can utilize appraisals with exterior-only inspections, desktop appraisals, and appraisal waivers.

 Updated Appraisal Flexibilities from Other Federal Agencies

In addition HUD, the VA, and the Agriculture Department have issued guidance on appraisal flexibility that closely align with the appraisal flexibilities offered by Fannie Mae and Freddie Mac, including desktop appraisals and exterior-only inspections for certain real estate transactions. See:

Letters to Credit Unions 20-CU-09 Temporary Regulatory Relief in Response to the COVID-19 Pandemic

April 2020

NCUA’s guidance reviews actions the agency has taken to provide “temporary regulatory relief” to federally insured credit unions (FICUs) during the COVID-19 crisis. Many of the relief provisions were approved by the NCUA Board during its April meeting.

  • 701.36 FCU Occupancy & Disposal of Acquired Premises [FCU only]

FCUs cannot retain premises that are not being used to conduct credit union business unless they are granted a waiver from NCUA. NCUA has amended the timeframe for calculating the need for such waivers so that delays that fall within the date of the temporary final rule’s publication in the Federal Register and December 31, 2020, will not be counted for purposes of determining a FCU’s compliance with § 701.36(c).

  •  701.23(b) Purchase of Eligible Obligations [Likely FCU only]

Part 701.23(b)(2) permits well-capitalized FCUs with a composite CAMEL rating of 1 or 2 to purchase eligible obligations, without regard to whether they are obligations of its members, from another FICU or a liquidating credit union. NCUA has expanded the eligibility to include composite CAMEL 3 FCUs. NCUA will also allow FCUs to purchase eligible obligations pursuant to § 701.23(b)(1)(i) or § 701.23(b)(2)(i) without regard to whether the purchasing credit union is empowered to grant such loans.

Loans purchased under this broader authority will not count against the § 701.23(b)(4) limit of 5% of the unimpaired capita/surplus. This authority expires on December 31, 2020, at which time any purchases made under this authority will be grandfathered.

For FISCUs, § 701.23(b)(1) is referred to in Part 741.8 as a classification of loans not requiring the pre-approval of the NCUA for purchase. Although NCUA’s rules are a bit ambiguous on this point, it does not appear this affects regulatory relief effects FISCUs.

  • 701.22 Loan Participations [Benefits FISCUs]

NCUA is raising the § 701.22(b)(5) limit of a FICU’s aggregate amount of loan participation purchased from any one originating lender to $5 million or 100% of the credit union’s net worth, unless a waiver is obtained from the NCUA RD. NCUA has temporarily increased the limit, until December 31, 2020,  below which a waiver is not required to the greater of $5 million or 200% of the credit union’s net worth. Part 701.22 applies to FISCUs by reference in § 741.8.

 NCUA notes in its guidance that additional relief available to FICUs includes:

  • Annual Supervisory Committee Audit Reports – In 2019 NCUA eliminated the requirement that annual audits be delivered within 120 days of the end of the year. NCUA will take into account that COVID-19 may delay audit delivery beyond the time established in the retention letter for NCUA mandated audits.
  • Late Call Report Civil Money Penalties – The NCUA will not take action against any credit union for submitting the March 31 Call Report after the respective filing deadline as long as the report is submitted within 30 days of the April 26, 2020, file date. SCUs should contact their state regulators if delayed.
  • Miscellaneous Policy and Review Requirements – NCUA will not take exception to policy changes that are made in the long-term best interests of a credit union and its members or if credit unions may need to make exceptions to their policies to assist members affected by the pandemic.