CUSO Archives - Page 17 of 30

Notice of Proposed Rulemaking and Request for Comment
NCUA: Subordinated Debt

NASCUS Legislative and Regulatory Affairs Department
October 5, 2022

At the September 22, 2022, NCUA Board meeting, the Board approved for comment a proposed rule that would amend the Subordinated Debt rule (the Current Rule), which the Board finalized in December 2020 with an effective date of January 1, 2022. The proposal would make two changes related to the maturity of Subordinated Debt Notes and Grandfathered Secondary Capital (GSC).

The proposed rule also includes four other minor modifications to the current subordinated debt rule. The proposed rule in its entirety can be found here. Comments are due December 5, 2022.

Summary

At the December 2020 NCUA Board meeting, the Board issued a final Subordinated Debt rule. This rule permitted Low Income Credit Unions (LICUs), complex credit unions, and new credit unions to issue Subordinated Debt for purposes of Regulatory Capital treatment. This rule also included a provision providing any secondary capital issued by LICUs under previously effective 12 CFR §701.34(b)[1], would be considered GSC. This rule also contained a provision requiring notes to have a minimum maturity of five years and a maximum maturity of 20 years.

After the issuance of this final rule, Congress passed the Consolidated Appropriations Act of 2021. The Consolidated Appropriations Act created the Emergency Capital Investment Program (ECIP), in which Congress appropriated funds and directed Treasury to make investments in “eligible institutions” to support their efforts to “provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers, especially in low-income and underserved communities.”

Under Treasury’s terms, credit unions eligible to participate in the ECIP program were permitted to apply to NCUA for secondary capital treatment. Treasury offered 15 or 30-year maturity options for the investments.

In October 2021, NCUA issued LTCU 21-CU-11 permitting LICUs participating in ECIP to issue 30-year subordinated debt instruments. In December 2021, the Board issued a final amendment to the Current Rule permitting secondary capital to be considered GSC regardless of the actual issuance date provided a secondary capital issuance was:

To the U.S. Government; and
Secondary Capital application was approved before January 1, 2022, under §701.34 or §741.203[2] for federally insured state-chartered credit unions.

Due to the conflict between the 20-year maximum term for regulatory capital treatment for GSC under the Current Rule and the 30-year maturity under ECIP, the NCUA conducted a study. Based on the research findings, the board is proposing the following amendments.

Proposed Rule Provisions

Specifically, the Board is proposing revisions to §702.401(b) to permit GSC to receive Regulatory Capital treatment for a period of 30 years from the later date of issuance or January 1, 2022. This change would:

Align the Regulatory Capital treatment with the maximum permissible maturity for secondary capital issued under the ECIP.
Align the Regulatory Capital treatment across all GSC. This alignment would provide flexibility to LICUs with GSC that have a maturity longer than 20 years while striking a balance between transitioning issuers of GSC to the Current Rule and ensuring that instruments do not indefinitely remain GSC.

In place of the 20-year maximum maturity, the proposal would instead require a credit union to provide certain information under §702.408 when applying to issue Notes with maturities longer than 20 years from the date of issuance. To demonstrate the issuance is debt, the proposal includes a new paragraph in §702.408(b) requiring a credit union applying to issue Notices with maturities longer than 20 years to submit, at the discretion of the appropriate supervisory office, one or more of the following:

A written legal opinion from Qualified Counsel;
A written opinion from a licensed CPA; and
An analysis conducted by the credit union or independent third party.

The proposal notes, while unlikely, it is still possible a legal or CPA opinion may be necessary to fully ensure that a Note would be considered debt irrespective of the degree to which the maturity exceeds 20 years.

The Board is proposing four additional modifications to the Current Rule. The proposed amendments include:

Amending the definition of “Qualified Counsel” to clarify that such a person(s) is not required to be licensed to practice law in every jurisdiction that may relate to the issuance of subordinated debt. Specifically, the change would specify that a “Qualified Counsel” is:

Licensed to practice law;
Has expertise in the areas of Federal and state securities laws and debt transactions similar to those described in the Current Rule; and
Qualified to provide sufficient advice to a credit union to comply with the requirement in §702.406(f) that an Issuing Credit Union must comply with all applicable Federal and state securities laws.

Therefore, the proposal would remove “in the relevant jurisdiction(s)” from the definition of “Qualified Counsel.” It is important to note that issuing credit unions must comply with all Federal and state securities laws

Remove the “statement of cash flow” from the Pro Forma Financial Statements requirement and replace it with a requirement for “cash flow projections.” This proposed change would better align the requirements of the current rule with the customary way credit unions develop Pro Forma Financial Statements and “cash flow projections.”

Revise the section of the current rule on filing requirements and inspection of documents. This change would align the NCUA rule with current agency procedures and would specifically:

Remove the phrase “inspection of documents” as the Board believes FOIA is the appropriate mechanism for requesting Subordinated Debt applications and documents.
Replace the current requirement that a credit union submit all applicable documents via the NCUA’s website with a requirement that a credit union make all submissions directly to the Appropriate Supervision Office.

Remove a parenthetical reference related to GSC that no longer counts as regulatory capital. §702.414(c) would be revised by removing “(“discounted secondary capital” re-categorized as Subordinated Debt).” This change would align the rule with recent changes made to the Call Report.

[1] 86 Fed. Reg., 72807 (December 23, 2021)

[2] 84 Fed. Reg. 1608, (February 5, 2019)

NCUA Proposed Rule Summary: Federal Credit Union Bylaws Relating to Expulsion of a Member

NASCUS Legislative and Regulatory Affairs Department
September 27, 2022

During the September 22, 2022, NCUA Board Meeting, the Board approved for publication and comment a proposed rule providing bylaw amendments that would allow additional authority for FCUs in the expulsion of members for cause. The proposed rule seeks to incorporate legislative changes resulting from the March 15, 2022, effective Credit Union Governance Modernization Act of 2022 (Governance Modernization Act) which ordered NCUA to develop policy by which a FCU member may be expelled by a two-thirds vote of a quorum of the FCU’s board of directors.

The deadline to submit a comment is December 2^nd, 2022. The proposed rule may be read in its entirety here.

Summary

Under current bylaws, FCUs are limited to two methods in the expulsion of a member: (1) A two-thirds vote of the membership present at a special meeting called for that purpose after the individual is provided an opportunity to be heard; and (2) for non-participation in the affairs of the credit union, as specified in a policy adopted and enforced by the board.[1] These requirements are set out in the standard FCU Bylaws in Appendix A of the NCUA’s regulations.[2]

During the process of amending the Bylaws resulting in the 2019 Bylaws Final Rule [3] concerns were expressed that current FCU bylaws limited a FCUs ability to mitigate threats or financial harm caused by violent, belligerent, or disruptive members.

As existing expulsion parameters were outlined within the FCU Act, bylaw changes to appropriately address those concerns in 2019 were restricted to allowing a credit union to limit services provided to disruptive members by defining a “member in good standing”.[4] Members no longer meeting the good standing requirements, while retaining membership, could see their access to all or some of the services provided by the credit union curtailed if their conduct caused a loss to the FCU or threatened the safety of credit union staff, facilities or membership or its surrounding property. While access to services could be limited, members outside of good standing still maintained rights to attend, participate, and vote at meetings and to maintain a share account unless expulsion was gained through the options outlined above.

While the concept of “member in good standing” created in the 2019 rule change is being retained, the passage of the Governance Modernization Act provides FCU boards of directors with direct authority (subject to the promulgation of the proposed rule and an appropriate board policy) to expel a member for cause.

As written, the proposed rule outlines broad rights and responsibilities of the FCU and the involved member but lacks prescriptive details as to the format of meetings and related processes. Such broad language is presumably established to allow each institution the freedom to adopt an appropriate policy that fits into each institutions current structure and specific processes within the structure of the bylaws and existing law. However, the proposal does request feedback in several areas as to whether more prescriptive language would be appropriate to include in the bylaws and why, instead of allowing these procedures to be implemented through board approved policies.

Proposed Rule Provisions

In addition to existing FCU authority to immediately limit services to members who caused a loss to the credit union and/or exhibited violent or abuse behavior, the proposed rule would provide an avenue for a FCU’s board to expel a disruptive member.

Under the proposed changes a FCU’s board may expel a member for cause, defined as:

a substantial or repeated violation of the membership agreement of the credit union;
a substantial or repeated disruption, including dangerous or abusive behavior (as defined by the National Credit Union Administration Board pursuant to a rulemaking), to the operations of a credit union; or
fraud, attempted fraud, or other illegal conduct that a member has been convicted of in relation to the credit union, including the credit union’s employees conducting business on behalf of the credit union.

The proposed rule maintains the concept, but lacks specific definition of, substantial and non-substantial incidents and requires expulsion for any non-substantial incidents to be preceded by at least one previous notice to the member regarding the exhibited behavior and documentation to support the repetitive nature of that behavior. Approved policies by the FCU board are expected to define substantial and non-substantial incidents.

Members being expelled must be notified of the pending expulsion by mail, or electronically if the member has opted into such notices. Notice must include the specific reasoning, and examples of the disruptive behavior(s), for the proposed expulsion and not include conclusory statements. A member provided notice is afforded the right to request a hearing within a timeframe no less than 60 days from the notification receipt which must also be prescribed within the notice. If the member does not provide a request for a hearing a member is automatically expelled at the conclusion of the stated 60-day notification period requiring no further action by the FCU board.

If a hearing is requested, the proposed rule outlines that a FCU may not raise any rationale or reasoning not explicitly provided in the initial notice although a second notice with additional information may be issued in a new notice of expulsion, which would initiate a new 60-day appeal response deadline for the member.

After a hearing the FCU board of directors must hold a second vote on the member expulsion within 30 calendar days considering any arguments made by the member.

A final notice of expulsion must be provided to a member regardless of its implementation automatically (due to a member’s lack of appeal) or through a final expulsion vote by the board after an appeal hearing. A final notice must provide pertinent information to the member including that an expulsion does not relieve the member of their contractual obligations to the FCU, the members right to collect any outstanding shares and the delivery method for return the member’s funds. In incidents where deductions are made from funds distributed to the excluded member, a line-by-line accounting relevant to the separation of membership must also be provided.

Finally, the proposed rule adopts the Governance Modernization Act requirements that any expelled member can be reinstated by either a majority vote of a quorum of the directors or a majority vote of the members present at a special meeting. An expelled member would not be entitled to attend in person under the statutory provisions, but a FCU could determine whether to permit in-person attendance within the outlined policy. The proposed rule specifies that a FCU is only required to hold a meeting under the reinstatement provision for a member once.

If a special meeting of the membership is instituted to expel a member such a meeting must be in person and the vote can only include members present at the meeting.

Under the proposed rules exclusion of a member is only allowed on a case-by-case basis and not to be administered to a class of members (such as through delinquency performance).

[1] 12 U.S.C. 1764.

[2] 12 CFR part 701, App. A. Section 108 of the FCU Act requires the Board to prepare periodically a form of bylaws to be used by FCU incorporators and to provide that form to FCU incorporators upon request. 12 U.S.C. 1758. FCU incorporators must submit proposed bylaws to the NCUA as part of the chartering process. Once the NCUA has approved an FCU’s proposed bylaws, the FCU must operate according to its approved bylaws or seek agency approval for a bylaw amendment that is not among permissible options in the standard FCU Bylaws. 12 CFR 701.2(a).

[3] 84 FR 53278 (Oct. 4, 2019).

[4] 12 CFR part 701, App. A. Art. II, Sec. 5

Summary: Ensuring Responsible Development of Digital Assets

Prepared by NASCUS Legislative & Regulatory Affairs Department
September 2022

On March 9, 2022, the Biden Administration issued Executive Order 14067 ‘‘Ensuring Responsible Development of Digital Assets.’’ The Executive Order outlined the following principal U.S. policy objectives with respect to digital assets:

Protection of consumers, investors, and businesses in the United States.
Protection of United States and global financial stability and the mitigation of systemic risk.
Mitigation of illicit finance and national security risks posed by misuse of digital assets.
Reinforcement of U.S. leadership in the global financial system and in technological and economic competitiveness, including through the responsible development of payment innovations and digital assets.
Promotion of access to safe and affordable financial services.
Support of technological advances that promote responsible development and use of digital assets.

Executive Order 14067 also directed various federal agencies to scrutinize the use of digital assets in the facilitation of financial crimes. In September 2022, the Biden Administration released a framework developed by the Treasury Department for the responsible development of digital assets. Now, the Treasury Department has published this Request for Comments (RFC) seeking input on any matter relevant to Treasury’s ongoing efforts to assess the illicit finance risks associated with digital assets as well as the ongoing efforts to mitigate the risks.

Comments are due to the Treasury Department on or before November 3, 2022. The Request for comments may be read in its entirety here.

The Request for Comments

Commenters are encouraged to address any or all of the following questions, or to provide any other comments relevant to the development of the report. The RFC is organized into 5 sections addressing the risks of illicit activity presented by digital assets, the BSA/AML regulatory framework for digital assets, global consistency in anti-money laundering standards, private sector engagement with digital assets and AML solutions, and Central Bank Digital Currencies.

A. Illicit Finance Risks

Has Treasury comprehensively defined the illicit financing risks associated with digital assets? Please list any key illicit financing risks that we have not raised in this Action Plan or the National Risk Assessment.
How might future technological innovations in digital assets present new illicit finance risks or mitigate illicit finance risks?
What are the illicit finance risks related to non-fungible tokens?
What are the illicit finance risks related to decentralized finance (DeFi) and peer-to-peer payment technologies?

B. AML/CFT Regulation and Supervision

What additional steps should the United States government take to more effectively deter, detect, and disrupt the misuse of digital assets and digital asset service providers by criminals?
Are there specific areas related to AML/CFT and sanctions obligations with respect to digital assets that require additional clarity?
What existing regulatory obligations in your view are not or no longer fit for purpose as it relates to digital assets? If you believe some are not fit for purpose, what alternative obligations should be imposed to effectively address illicit finance risks related to digital assets and vulnerabilities?
What regulatory changes would help better mitigate illicit financing risks associated with digital assets?
How can the U.S. government improve state-state and state-federal coordination for AML/CFT regulation and supervision for digital assets?
What additional steps should the U.S. government consider to combat ransomware?
What additional steps should the U.S. government consider to address the illicit finance risks related to mixers and other anonymity-enhancing technologies?
What steps should the U.S. government take to effectively mitigate the illicit finance risks related to DeFi?

C. Global Implementation of AML/CFT Standards

How can Treasury most effectively support consistent implementation of global AML/CFT standards across jurisdictions for digital assets, including virtual assets and virtual asset service providers (VASP)?
Are there specific countries or jurisdictions where the U.S. government should focus its efforts, through bilateral outreach and technical assistance, to strengthen foreign AML/CFT regimes related to virtual asset service providers?

D. Private Sector Engagement and AML/ CFT Solutions

How can Treasury maximize public-private and private-private information sharing on illicit finance and digital assets?
How can the U.S. Department of the Treasury, in concert with other government agencies, improve guidance and public-private communication on AML/CFT and sanctions obligations with regard to digital assets?
How can Treasury encourage the use of collaborative analytics to address illicit financing risks associated with digital assets while also respecting due process and privacy?
What technological solutions designed to improve AML/CFT and sanctions compliance are being used by the private sector for digital assets? Can these technologies be employed to better identify and disrupt illicit finance associated with digital assets and if so, how?
Are there additional steps the U.S. Government can take to promote the development and implementation of innovative technologies designed to improve AML/CFT compliance with respect to digital assets?
How can law enforcement and supervisory efforts related to countering illicit finance in digital assets better integrate private sector resources?
How can Treasury maximize the development and use of emerging technologies like blockchain analytics, travel rule solutions, or blockchain native AML/CFT solutions, to strengthen AML/CFT compliance related to digital assets?
How can financial institutions offering digital assets better integrate controls focused on fiat currency and digital asset transaction monitoring and customer identification information to more effectively identify, mitigate, and report illicit finance risks?

E. Central Bank Digital Currencies (CBDC)

How can Treasury most effectively support the incorporation of AML/CFT controls into a potential U.S. CBDC design?

Letter to Credit Unions 22-CU-09 and Supervisory Letter 22-01

NCUA Updates to Interest Rate Risk Supervisory Framework

NASCUS Legislative and Regulatory Affairs Department
September 3, 2022

NCUA has issued Letter to Credit Unions 22-CU-09 Updates to Interest Rate Risk Supervisory Framework to alert credit unions to guidance the agency provided its examination staff to regarding changes to NCUA’s interest rate risk (IRR) supervisory framework. The guidance issued to NCUA examiners, SL No. 22-01, discussed 4 primary changes to NCUA’s IRR supervisory framework:

Revising the risk classifications by eliminating the extreme risk classification and modifying the high risk classification;
Clarifying when a Document of Resolution (DOR) to address IRR is warranted, including removing any presumed need for a DOR based on an IRR supervisory risk classification and related need for a credit union to develop a de-risking plan;
Providing examiners more flexibility in assigning IRR supervisory risk ratings; and
Revising examination procedures to incorporate updated review steps when assessing how a credit union’s management of IRR is adapting to changes in the economic and interest rate environment.

NCUA’s new guidance amends the framework established in LTCU 16-CU-08, Revised Interest Rate Risk (IRR) Supervision, (January 1, 2017) and outlined in the Examiner’s Guide.

Acronym Glossary:

ENT = estimated NEV tool

IRR = interest rate risk

NEV = net economic value

NCUA’s rules for credit union management of interest rate risk are found in Part 741.3(b) and its Appendix A.

Summary

The revisions to the IRR framework of the NCUA Examiner’s Guide outlined in Supervisory Letter 22-01 apply to institutions over $50 million and include:

Revising the risk classifications by eliminating the extreme risk classification and modifying the high risk classification;

Under the revised NEV test system only three classifications would be used: Low, Moderate and High. The Extreme classification is being eliminated. The three risk classifications will continue to determine the scope of examination review steps.

The proposed framework would eliminate the “Extreme” classification under the NEV Test by recognizing any Post-shock NEV less than 4% or any NEV Sensitivity greater than 65% as “High”. Previously Post Shock NEV below 2% or NEV Sensitivity above 85% would have been classified as “Extreme”.

Clarifying when a Document of Resolution (DOR) to address IRR is warranted, including removing any presumed need for a DOR based on an IRR supervisory risk classification and related need for a credit union to develop a de-risking plan;

The updated framework clarifies that a DOR is not required for any NEV Test or ENT risk classification alone (i.e. just because risk classification is considered high). Similarly, a credit union would NOT be expected to have a plan of action based SOLELY on a “High” classification. Rather, the need for a DOR would be determined on a case-by-case basis.

NCUA provides several examples of situations that WOULD warrant a DOR:

The level of IRR represents an undue risk to the Share Insurance Fund, and the credit union is not taking appropriate and prompt action to address;
Lack of adequately updating an approach to managing interest rate, liquidity, and related risks for the current market conditions by high risk classified credit unions;
Material governance deficiencies are noted relating to the identification, measurement, monitoring and/or control of IRR by any credit union

Providing examiners more flexibility in assigning IRR Supervisory risk ratings;

Assignment of the IRR rating will continue to be based on the quantitative NEV Test or ENT but may be improved, or worsened, by other factors. The guidance points out that upgrading a rating would be unusual for an examiner and would most often result from borderline moderate- to high-risk classifications.

Revising examination procedures to incorporate updated review steps when assessing how a credit union’s management of IRR is adapting to changes in the economic and interest rate environment.

Examiners will continue to use the IRR Workbook as a job aid when reviewing IRR. However, a new resource table (High IRR Job Aid) will be used to mitigate the impact of the current IRR and economic volatility environments. The new job aid will integrate with the current job aid when applicable and be used to help identify the specific source of the high IRR, risk management and controls weaknesses and measure the potential impact on earnings and capital. Institutions over $10 billion will require all review steps in the IRR Workbook regardless of the risk classification category.

Additionally, the framework will include steps to assess the extent of a credit union’s use of third-party vendors and their ability to understand the information provided by such a vendor.

Joint Policy Statement Summary:
Prudent Commercial Real Estate Loan Accommodations and Workouts

NASCUS Legislative and Regulatory Affairs Department
August 4, 2022

The NCUA, FDIC, and OCC have published a joint policy statement on Prudent Commercial Real Estate Loan Accommodations and Workouts. If finalized, the policy statement would address supervisory expectations related to commercial real estate risk management elements, loan classifications, regulatory reporting, and accounting considerations by updating existing interagency guidance, provide updated examples of classifications and income property valuation methodologies and address relevant accounting changes on loss estimates in Generally Accepted Accounting Principles (GAAP).

The deadline to submit a comment is October 3, 2022. The proposed rule may be read in its entirety here.

In the request for comments, the agencies seek responses to the following questions:

Question 1: To what extent does the proposed Statement reflect safe and sound practices currently incorporated in a financial institution’s CRE loan accommodations and workout activities? Should the agencies add, modify, or remove any elements, and, if so, which and why?
Question 2: What additional information, if any, should be included to optimize the guidance for managing CRE loan portfolios during all business cycles and why?
Question 3: Some of the principles discussed in the proposed Statement are appropriate for Commercial and Industrial (C&I) lending secured by personal property or other business assets. Should the agencies further address C&I lending more explicitly, and if so, how?
Question 4: What additional loan workout examples or scenarios should the agencies include or discuss? Are there examples in Appendix 1 of the proposed statement that are not needed, and if so, why not? Should any of the examples in the proposed Statement be revised to better reflect current practices, and if so, how?
Question 5: To what extent do the TDR examples continue to be relevant in 2023 given that ASU 2022-02 eliminates the need for a financial institution to identify and account for a new loan modification as a TDR.

Summary

On October 30, 2009, the agencies along with the Board of Governors of the FRB, FFIEC State Liaison Committee, and the former Office of Thrift Supervision, adopted the Policy Statement on Prudent Commercial Real Estate Loan Workouts, which was issued by the FFIEC to help examiners and financial institutions understand risk management and accounting practices for CRE loan workouts.

The proposed updates incorporate recent policy guidance on loan accommodations and accounting developments for estimating loan losses.

Outlining principle-based supervisory expectations to facilitate and underscore the importance of working constructively, in a prudent manner with CRE borrowers who are experiencing financial difficulties.
Promote consistent examination treatment of related loans throughout the system.
Reflect changes in GAAP since 2009, including those in relation to current expected credit losses (CECL)
Distinguish the difference between GAAP credit loss measurement and Supervisory classifications.
Provide reference information on GAAP without providing guidance on a matter outside Regulator purview.

Proposed changes include:

A new section on short-term loan accommodations.
Distinguishing between short-term/less complex loan accommodations and longer-term/more complex accommodations.
Providing information resources related to accounting changes.
Providing new guidance on several methodologies to value income CRE collateral.

Further, the proposed Policy statement seeks guidance on the appropriateness of TDR guidance within the Statement given the upcoming implementation of ASU 2022-22 (12/23), eliminating the requirement for financial institutions to report TDRs, if the Policy Statement should also be applied to C&I loans or if additional loan workout examples or guidance would be helpful.

NASCUS note: The publication of the Statement seems to indicate regulatory agencies are preemptively addressing concerns that CRE loans (particularly collateral values) could become problematic, such as during the downturn in the late 2000s that precipitated significant financial institution failures.

NASCUS note: FCUs under $10 million are not required to comply with GAAP. Some states also have similar provisions with a base of various asset sizes.

NASCUS note: While federal bank regulators clearly follow FFIEC loan classification standards of substandard, doubtful and loss staff are unaware of individual loss classifications methodology relating to NCUA and believes many state regulators also do not regularly perform loan classifications for loss. The policy statement makes clear that losses for accounting treatment and regulatory capital purposes can and sometimes should be different.

Final Rule Summary: Asset Threshold for Determining the Appropriate Supervisory Office;
Office of National Examinations and Supervision (ONES)

NASCUS Legislative and Regulatory Affairs Department
August 3, 2022

The NCUA Board is amending its regulations to revise the $10 billion asset threshold used for assigning supervision of consumer federally insured credit unions (FICUs) to the Office of National Examinations and Supervision (ONES). The rule does not alter any regulatory requirements for covered credit unions. The rule only applies to FICUs whose assets are $10 billion or more. The rule provides that covered credit unions with less than $15 billion in total assets, referred to as Tier I credit unions, will be supervised by the appropriate NCUA Regional Office. Credit unions with $15 billion or more in total assets, considered Tier II and Tier III, will continue to be supervised by ONES.

The final rule is effective January 1, 2023, and can be found in its entirety here.

Summary

In 2012 NCUA established ONES and reorganized the central and field office structure. As part of this restructuring, NCUA transferred the responsibility for supervising covered credit unions to ONES from the respective regional offices. Initially, a covered credit union was transferred to ONES on January 1, 2014. Annually, thereafter, FICUs newly reporting assets of $10 billion or more on March 31 of a given calendar year are reassigned on the first day of the following calendar year.

As a requirement of NCUA Part 702 consumer credit unions of a certain size are subject to capital planning and stress testing requirements. A covered credit union for purposes of ONES is a FICU whose assets are $10 billion or more. Covered credit unions are then divided into three asset tiers:

Tier I – Less than $15 billion in total assets

Tier II – $15 billion or more in total assets, but less than $20 billion in total assets

Tier III – $20 billion or more in total assets

Under the final rule, credit unions considered Tier II or Tier III remain subject to ONES supervision. The final rule does not assign Tier I credit unions to ONES supervision. Tier I credit unions will remain subject to Regional Office supervision until they become a Tier II. Additionally, all covered credit unions remain subject to enhanced capital planning and stress testing.

Grandfathered Covered Credit Unions

It is important to note, that under the proposed rule, Tier I credit unions that were supervised by ONES were grandfathered and remained subject to ONES supervision. The Board finalized the rule WITHOUT the grandfather clause for Tier I credit unions already supervised by ONES, stating this provision has become unnecessary. All credit unions currently supervised by ONES have reported assets of $15 billion or more as of March 31, 2022. Therefore, all credit unions assigned to ONES will be categorized as Tier II or Tier III effective January 1, 2023, and will remain with ONES under this final rule.

Data Collection and Coordination

As previously noted, under the final rule, all covered credit unions remain subject to enhanced capital planning and stress testing data collections. Data collection is part of NCUA’s strategic initiative to enhance supervision and issued to inform qualitative and quantitative assessments of covered credit unions The Board does not believe the data collection presents an undue burden to covered credit unions as the data is the type of information the Board expects covered credit unions to be analyzing and considering regardless of whether NCUA collects the information.

The final rule notes that ONES will manage the data collection process for all Tier I credit unions and that ONES will be the point of contact for resolving any data collection issues, in collaboration with the assigned Regional office.

Examinations

The Board intends for the coordination between ONES and the Regional offices to be ongoing. ONES is providing a capital plan training program to Regional offices to ensure consistency of review across NCUA. The scope of Regional office examinations will remain consistent with the scope of ONES’ examinations as both officers are subject to the same national examination standards, therefore, the Board does not expect the review of capital plans or general supervision of Tier I credit unions to be different under the Regional offices.

Reservation of Authority

The final rule addresses the Board’s existing reservations of authority under Part 702 and designates a FICU as subject to ONES or Regional office supervision, or a Tier I, II, or III credit union. For example, the Board may use this authority to subject a Tier I credit union that would otherwise be supervised by a Regional office to ONES supervision or exercise its authority by subjecting a Tier II to Regional office supervision. Independent of the authority to designate a supervisory office, the Board may also use this authority to designate a credit union as a Tier I, II, or III.

The final rule also states that the Board does not believe an express requirement to consult and cooperate with state regulators is necessary before transferring a Tier I federally insured state-chartered credit union (FISCU) to ONES, it expects consultation with state regulators would occur prior to exercising its authority under the final rule.

CFPB Summary re: Fair Credit Reporting: Permissible Purposes for Furnishing, Using, and Obtaining Consumer Reports

12 CFR Part 1022

The Consumer Financial Protection Bureau (CFPB) is issuing this advisory opinion to outline certain obligations of consumer reporting agencies and consumer report users under Section 604 of the Fair Credit Reporting Act (FCRA). The opinion explains that the permissible purposes listed in FCRA Section 604(a)(3) are consumer specific, and it affirms that a consumer reporting agency may not provide a consumer report to a user under FCRA Section 604(a)(3) unless it has reason to believe that all of the consumer report information it includes pertains to the consumer who is the subject of the user’s request. The Bureau notes that disclaimers will not cure a failure to have a reason to believe that a user has a permissible purpose for a consumer report provided pursuant to FCRA Section 604(a)(3). The advisory opinion also reminds consumer report users that FCRA Section 604(f) strictly prohibits a person who uses or obtains a consumer report from doing so without a permissible purpose.

The advisory opinion became effective on July 12, 2022 and can be found here.

Summary:

The FCRA regulates consumer reporting. Congress enacted the statute to ensure fair and accurate credit reporting, promote efficiency in the banking system and protect consumer privacy. A major purpose of the FCRA is the privacy of consumer data.

The FCRA protects consumer privacy data in multiple ways, including by limiting the circumstances under which consumer reporting agencies may disclose consumer information. Section 604 identifies an exclusive list of “permissive purposes” for which consumer reporting agencies may provide consumer reports, including in accordance with the written instructions of the consumer to whom the report relates and for purposes relating to credit, employment and insurance. The statute states that a consumer reporting agency may provide consumer reports under these circumstances and no other. In addition, FCRA Section 607(a) requires that “every consumer reporting agency shall maintain reasonable procedures designed to…limit the furnishing of consumer reports to the purposes listed under Section 604. Section 620 imposes criminal liability on any officer or employee of a consumer reporting agency who knowingly and willfully provides information concerning an individual from the agency’s files to an unauthorized person.

In addition, the FCRA limits the circumstances under which third parties may obtain and use consumer report information from consumer reporting agencies. FCRA Section 604(f) provides that “a person shall not use or obtain a consumer report for any purpose unless the consumer report is obtained for a purpose for which the consumer report is authorized to be furnished and the purpose is certified in accordance with the FCRA Section 607 by a prospective user of the report through a general or specific certification. FCRA Section 619 imposes criminal liability on any person who knowingly and willfully obtains information on a consumer from a consumer reporting agency under false pretenses.

NCUA Letter to Credit Unions 22-CU-08: Risk-Based Approach to Assessing Customer Relationships and Conducting Customer Due Diligence

NCUA has issued LTCU 22-CU-08 as part of a joint statement with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of Currency and the U.S. Department of Treasury’s Financial Crimes Enforcement Network (collectively, the Agencies).

The joint statement clarifies NCUA’s position that credit unions must take a risk-based approach in assessing individual member risk. It also reinforces the NCUA’s position that no single customer type automatically presents a high risk of money laundering, terrorist financing, or other illicit financial activity risk. NCUA also advises against refusing or discontinuing service to an entire class of members based on perceived risk. The Joint Statement refers to the examples of customer (member) types listed in the CDD section of the Federal Financial Institutions Examination Council (FFIEC) Bank Secrecy Act/Anti-Money Laundering Examination Manual, including, independent ATM owners or operators, nonresident aliens and foreign individuals, charities and nonprofit organizations, professional service providers, cash intensive businesses, nonbank financial institutions, and customers the bank considers politically exposed persons. The agencies reiterate that banks and credit unions should make their own business decisions on business relationships based on their own due diligence.

This statement does not include any changes to the Bank Secrecy Act (BSA) regulations but rather supports the long-standing approach to CDD outlined in the BSA as well as the Federal Financial Institution Examination Council’s BSA/AML Examination Manual.

CFPB Summary re: Advanced Notice of Proposed Rulemaking regarding Credit Card Late Fees and Late Payments
12 CFR Part 1026

The Consumer Financial Protection Bureau (CFPB) is seeking information from credit card issuers, consumer groups, and the public regarding credit card late fees and late payments, and card issuers’ revenue and expenses. For example, the Bureau is seeking information relevant to certain provisions related to credit card late fees in the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) and Regulation Z. Areas of inquiry include: factors used by card issuers to set late fee amounts; card issuers’ costs and losses associated with late payments; the deterrent effects of late fees; cardholders’ late payment behavior; methods that card issuers use to facilitate or encourage timely payments, including autopay and notifications, harbor provisions in Regulation Z; and card issuers’ revenue and expenses related to their domestic consumer credit card operations.

Comments on the ANPRM are due by July 22, 2022. The ANPRM can be found here.

Summary:

The Bureau is charged with monitoring for risks to consumers in the offering or provision of consumer financial products/services. Specifically, Section 149(a) of the CARD Act provides that the amount of any penalty fee or charge that a card issuer may impose with respect to a credit card account (under an open-end consumer credit plan) in connection with any omission with respect to, or violation of, the cardholder agreement, including any late payment fee, over-the-limit fee or any other penalty fee or charge, must be reasonable and proportional to such omission or violation. Section 149(b) of the Act directs the Bureau to issued rules that establish standards for assessing whether the amount of any penalty fee or charge is reasonable and proportional to the omission or violation to which the fee or charge relates. In issuing such rules, the Act requires the Bureau to consider: (i) the cost incurred by the creditor from an omission or violation; (ii) the deterrence of omissions or violations by the cardholder; (iii) the conduct of the cardholder; and (iv) such other factors that the Bureau may deem necessary or appropriate.

The Act authorizes the Bureau to establish different standards for different types of fees/charges and authorizes the Bureau (in consultation with other agencies) to provide an amount for any penalty fee or charge that is presumed to be reasonable and proportional to the omission/violation to which the fee relates.

Section 1026.52 of Regulation Z, which implements the CARD Act, states that a card issuer must not impose a fee for violating the terms or other requirements of a credit card account, including a late payment, unless the issuer has determined that the dollar amount of the fee represents a reasonable proportion of the total costs incurred by the issuer for that type of violation or complies with the safe harbor that is consistent with Section 1026.52. This section sets forth a safe harbor of $30 generally for a late payment, except that it sets forth a safe harbor of $41 for each subsequent late payment within the next six billing cycles. The safe harbor dollar amounts are subject to an annual inflation adjustment. A card issuer is not required to use the cost analysis to determine the amount of late fees if it complies with the safe harbor amounts.

Questions Asked

The questions in this notice cover several areas relating to the statutory and regulatory provisions, as well as areas relating more generally to the domestic consumer credit card market. Areas of inquiry include: factors used by card issuers to set late fee amounts, including but not limited to statutory factors described above; card issuers’ costs and losses associated with late payments; the deterrent effects of late fees; cardholders’ late payment behavior; methods that card issuers use to facilitate or encourage timely payments, including autopay and notifications; card issuers’ use of the late fee safe harbor provisions in Regulation Z; and card issuers’ revenue and expenses related to their domestic consumer credit card operations. In answering the questions, card issuer commenters should base their answers on information relevant to their domestic consumer credit card portfolios. Other commenters should base their answers on information they have about the domestic consumer credit card market.

Questions are divided among the following categories:

Factors used by card issuers to set existing levels of late fees
Costs and Losses
Deterrence
Cardholder Behavior
Autopay
Notifications of Upcoming Due Date
Courtesy Periods and Fee Waivers
Staggered Late Fee
Safe Harbor Provisions
Cost Analysis Provisions
Revenue and Expenses

CFPB Summary re: Request for Information Regarding Employer-Driven Debt
Docket No. CFPB-2022-0038

The Consumer Financial Protection Bureau (CFPB) is charged with monitoring markets for consumer financial products and services to ensure that they are fair, transparent and competitive. As part of this mandate, the CFPB is seeking input from the public on debt obligations incurred by consumers in the context of an employment or independent contractor arrangement. Areas of inquiry include prevalence, pricing and other terms of the obligations, disclosures, dispute resolution and the servicing and collection of these debts.

Comments to this Request for Information (RFI) must be received by September 7, 2022. The RFI can be accessed here.

Summary:

The CFPB has identified a potentially growing market of debt obligations incurred by consumers through employment arrangements. These debts appear to involve deferred payment to the employer or an associated entity for employer-mandated training, equipment and other expenses. Usually they appear in the following form:

Training repayment agreements that require workers to pay their employers (or third-party entities) for previously undertaken training provided by an employer or an associated entity if they separate voluntarily or involuntarily within a set time period.
Debt owed to an employer or third party entity for the up-front purchase of equipment and supplies essential to their work or required by the employer but not paid for by the employer.

The Bureau is concerned that this employer-driven debt could pose risks to consumers, including overextension of household finances, errors in servicing and collection, default and inaccurate credit reporting. In addition, errors and misinformation can create heightened risks of consumer harm at each stage of the debt life cycle, from origination through servicing and default or payoff. The Bureau notes that consumers may not understand whether these arrangements involve an extension of credit, whether they have the ability to comparison shop for credit offered by others or whether entering into the debt agreement is a condition of employment. Additional risks, specific to the employment context, may include whether default on the debt threatens continued or future employment, or whether the status of the debt is impacted by a decision to seek alternative employment. These risks might limit competition and transparency in this market for consumer financial products and services.

The Bureau is seeking information on how employer-driven debt has impacted the public and has provided a number of question prompts focusing on a number of topics such as:

Pre-origination
Origination
Servicing and Collections
Disputes
Credit Reporting
Financial Health

The Bureau notes that the public is not required to respond to the questions provided and can feel free to provide any information that would assist it in better understanding the relationship between labor practices and the market for consumer financial products/services.

CFPB Summary re: Debt Collection Practices (Regulation F); Pay to Pay Fees
12 CFR Part 1006

The Consumer Financial Protection Bureau (CFPB) issued this advisory opinion to affirm that this provision prohibits debt collectors from collecting pay to pay or “convenience” fees, such as fees imposed for making a payment online or my phone, when those fees are not expressly authorized

This advisory opinion became effective on July 5, 2022 and the advisory opinion can be found here.

Summary:

Section 808(1) of the Fair Debt Collection Practices Act (FDCPA) prohibits debt collectors from collecting any amount (including any interest, fee, charge or expense incidental to the principal obligation) unless that amount is expressly authorized by the agreement creating the debt or permitted by law. This advisory opinion also clarifies this limitation also applies to a debt collector that collects pay to pay fees through a third-party payment processor.

The FDCPA imposes various requirements and restrictions on debt collectors’ debt collection activity. Relevant here is section 808, which provides that a “debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt.” Section 808 then states that “without limiting the general application of the foregoing, the following conduct is a violation of this section” and enumerates eight specifically prohibited practices including the “collection of any amount (including any interest, fee, charge or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.

In 2017, the Bureau issued a compliance bulletin that “provides guidance to debt collectors about compliance with the FDCPA when assessing phone pay fees—a type of pay to pay fee. The bulletin summarizes, under Section 808(1), that debt collectors may collect such pay to pay fees only if the underlying contract or state law expressly authorizes those fees. CFPB examiners found that a debt collector “violated Section 808(1) when they charge fees for taking mortgage payments over the phone where the underlying contracts creating the debt did not expressly authorize collecting such fees and where the relevant State law did not expressly permit collecting such fees.

The advisory opinion applies to debt collectors as defined in Section 803(6) of the FDCPA and implemented in Regulation F. Pay to pay fees, sometimes called convenience fees, refers to fees incurred by consumers to make debt collection payments through a particular channel, such as over the telephone or online.

FinCEN ANPRM: No-Action Letters
Prepared by NASCUS Legislative & Regulatory Affairs Department
June 2022

FinCEN has issued an advance notice of proposed rulemaking (ANPRM) soliciting public comment on questions relating to the implementation of a no-action letter process. The no-action letter process at FinCEN may affect or overlap with other forms of regulatory guidance and relief FinCEN currently offers, including administrative rules and exceptive or exemptive relief. Therefore, the ANPRM seeks input from the public on whether a no-action letter process should be implemented and, if so, how the no-action letter process should interact with those other forms of relief.

Comments are due to FinCEN by August 5, 2022.

Summary

Section 6305(a) of the Anti-Money Laundering Act of 2020 (the AML Act) requires FinCEN to assess whether a no-action letter process should be established in response to inquiries concerning AML or countering the financing of terrorism (CFT) laws and how regulations apply to specific conduct.

The “no-action” letter is “a form of an exercise of enforcement discretion wherein an agency issues a letter indicating its intention not to take enforcement action against the submitting party for the specific conduct presented to the agency.” Such letters “address only prospective activity not yet undertaken by the submitting party.”

FinCEN submitted a Report to Congress on June 28, 2021, as required under 6305(b) of the AML Act, concluding that FinCEN should undertake a rulemaking to establish a no-action letter process to supplement the existing forms of regulatory guidance.

Regulatory Relief

FinCEN currently provides two forms of regulatory guidance. It may issue an administrative ruling that applies FinCEN’s interpretation of the Bank Secrecy Act (BSA), or it may provide exceptive/exemptive relief by granting an exception or exemption from BSA requirements in specific circumstances. An example of such a ruling/exception can be found here.

The no-action letter would provide a third form of guidance and would generally permit a submitting party to seek potential guidance from FinCEN indicating whether FinCEN would pursue or recommend enforcement action for specific conduct identified by the submitting party.

The AML Act and the No-Action Letter Report

The primary benefits of the no-action letter process identified in the 2021 Report include “promoting a robust and productive dialogue with the public, spurring innovation among financial institutions, and enhancing the culture of compliance and transparency in the application and enforcement of the BSA.”

Questions for Comment

The ANPRM consists of 48 questions. The questions include general questions related to the findings contained in the Assessment. In addition to the general questions, FinCEN is also seeking comment on several categories:

The contours and format of a FinCEN no-action letter process;
FinCEN jurisdiction and no-action letters;
Changed circumstances; revocation;
No-action letter denials and withdrawals; confidentiality; and
Consultation

NASCUS has highlighted some of those questions below.

While FinCEN has no legal authority to prevent another agency, including a Federal functional regulator or the DOJ, from taking an enforcement action under the laws or regulations that it administers, are there additional points FinCEN should consider in assessing the viability of a cross-regulator no-action letter process? What is the value of establish a FinCEN no-action letter process if other regulators with jurisdiction over the same entity do not issue a similar no-action letter?
Would a no-action letter process involving FinCEN only be useful? Why or why not?
To what extent would an institution be able to rely on a no-action letter from FinCEN if the institution is subject to oversight and examination for the same or similar matters by another agency?
What impact would a FinCEN-only no-action letter process or a cross-regulator no-action process have on State, local, or Tribal regulators?
Should FinCEN establish via regulation any limitations on which factual circumstances would be appropriate for a no-action letter? If yes, what should those limitations be?
Should FinCEN limit the scope of no-action letters so that such requests may not be submitted during a BSA or BSA-related examination—including when the subject of the request is already a matter under examination, or when it becomes a matter under examination while the no-action letter process is ongoing?
Would it be valuable for FinCEN provide to information from a no-action letter request to agencies with delegated examination authority under 31 CFR 1010.810 for the purpose of evaluating specific conduct addressed in a no-action letter request, including, among other things, to obtain information that may inform FinCEN’s response to the request?
How should the no-action letter process apply to agents, third parties, domestic affiliates, and foreign affiliates that may be conducting anti-money laundering or BSA functions on behalf of a financial institution either inside or outside the United States?
Should a change in the overall business organization, such as when two entities merge or one entity acquires another, cause a no-action letter to lose its effect? If so, under what circumstances? If not, how would such a no-action letter continue to apply?
Should FinCEN publicize standards governing the revocation of no-action letters, or should revocation be determined on a case-by-case basis?
If a no-action letter is revoked, how should FinCEN handle conduct that occurred while the no-action letter was active? In particular, would a rescission result in potential enforcement actions only for conduct after the rescission date, or would an entity also potentially be subject to liability for conduct that occurred while the now-revoked letter was active? Would the answer depend on the basis for the revocation?
Should FinCEN create an appeals or reconsideration process for no-action letter denials? What factors and procedures should this process involve?
Should FinCEN publish denials on its website? If so, what level of detail and type of information should be included? For example, should denials be anonymized?
Should FinCEN maintain the confidentiality of no-action letters for a period of time, or indefinitely, after granting them? Under what circumstances should FinCEN maintain confidentiality?
Should no-action letters be used as published precedents? If so, under what circumstances and conditions should they be precedential? Should no-action letters be applicable beyond the requesting institutions, and under what circumstances and conditions?
If no-action letters and their underlying requests are made public, how should FinCEN handle content that is confidential or sensitive, such as triggering mechanisms for suspicious activity report (SAR) reviews?
What procedures should be put in place for FinCEN to consult with other relevant regulators or law enforcement agencies regarding no-action letter requests?
How can FinCEN best balance the need to consult other regulators or law enforcement with the desires of submitting parties for confidentiality and expediency?
Should FinCEN require a submitting party that is seeking a no-action letter to identify all of its regulators? Should FinCEN require that institution to identify all of the regulators of its parent or subsidiary corporations?
Under what circumstances other than consultation should information FinCEN obtains through the no-action letter process be shared with other Federal, State, local, and Tribal agencies, including the U.S. Department of Justice?
What value or benefit does a no-action letter bring that is distinct from an administrative ruling, or from exceptive or exemptive relief?

Notice of Proposed Rulemaking: Subordinated Debt

Letter to Credit Unions 22-CU-09 and Supervisory Letter 22-01

NCUA Updates to Interest Rate Risk Supervisory Framework