NCUA to Implement Phase One of Resuming Onsite Operations

Letter to Credit Unions 21-CU-06 NCUA to Implement Phase One of Resuming Onsite Operations

July 2021— NCUA has announced that it is prepared to move into its first phase of resuming onsite operations (Phase 1) in some areas of the country. As part of Phase 1, NCUA examiners will be permitted to volunteer to work onsite at credit unions beginning July 19, 2021. Phase I parameters include:

  • Examiners may only volunteer to work onsite in locations where public health data indicates pandemic conditions have sufficiently moderated.
  • Examiners volunteering to work on-site will generally be expected to follow credit union policies related to safety and security.
  • NCUA will try to respect a credit union’s preference to not have examination staff onsite subject to supervisory necessities.

NCUA will continue to monitor the course of the pandemic and is prepared to adjust its plans as necessary.

Introduction:
The following is a Compendium of Part 741 of the Code of Federal Regulations (“CFR”). Part
741 governs Federally-Insured State-Chartered Credit Unions (“FISCUs”). Part 741 is divided
into two subparts. Subpart A contains regulations that apply directly to FISCUs and are not
codified elsewhere in the U.S. Code (“U.S.C.”) or CFR. While the regulations of Subpart A are
not fully codified elsewhere, they regularly reference other provisions of the U.S.C. and CFR.
Subpart B incorporates by reference complete provisions of the U.S.C. and CFR and applies
them to FISCUs.

Some provisions of Part 741 refer to sections of the U.S.C. or CFR that discuss activities that
may not be permitted under the law of the state in which the FISCU is chartered. Please note that
Part 741 does not enlarge the scope of a FISCU’s authority beyond what is permitted under
applicable state law.

How to use this Compendium:
This document is an integrated roadmap of Part 741. Each Section of Part 741 is listed in its
entirety. Where the text of Part 741 includes a cross-reference to other provisions of the U.S.C.
or CFR, such a cross-reference is indicated in bold. Click the bold text and your web browser will
automatically open the relevant provision at www.gpo.gov (for the U.S.C.) or www.ecfr.gov (for
the CFR).

Some provisions include a “Special Notes” section. These notes are not part of the text of Part
Rather, they are helpful links and guidance meant to make use the Compendium more
efficient.

Click here to access.

Final Rule Summary: Transition to CECL (Part 702)                 

Prepared by NASCUS Legislative & Regulatory Affairs Department
June 2021

NCUA has issued a final rule to facilitate the transition of federally insured credit unions (FICUs) to the current expected credit loss (CECL) methodology required under Generally Accepted Accounting Principles (GAAP). Pursuant to the final rule, for purposes of determining a FICU’s net worth classification under the § 702 prompt corrective action (PCA) regulations, NCUA will phase-in the day-one adverse effects on regulatory capital that may result from adoption of CECL. The rule will mitigate the effect of CECL adoption on PCA capital while requiring FICUs account for CECL for other purposes, such as Call Reports.

FICUs with less than $10 million in assets, will be allowed to use any reasonable reserve methodology (incurred loss), provided that the chosen methodology adequately covers known and probable loan losses.

** Note: SCUs with less than $10 million in assets may still be required to follow GAAP pursuant to state law.

This rule becomes effective August 2, 2021. The rule may be read in its entirety here.

Summary

The final rule adds a new subpart G to the § 702 PCA regulations,

  • Eligibility Criteria – there are 2 criteria for phase-in eligibility:
    • FICUs have not adopted CECL prior to their first fiscal year beginning after the FASB CECL implementation date of December 15, 2022; and
    • The FICU must record a reduction in retained earnings due to the adoption of CECL.
  • Implementation of the Transition Provisions – phase-in of CECL for eligible credit unions is mandatory: NCUA will not allow eligible credit unions (those that have not already implemented CECL and for which CECL results in a reduction of retained earnings) to opt out. This differs from the banking rule, but NCUA has said for ease of administration they have chosen to make phase-in mandatory.
  • Mechanics of the CECL Transition – to calculate the phase-in amount, NCUA will compare the differences in a FICU’s retained earnings between:

(1) the FICU’s closing balance sheet amount for the fiscal year-end immediately prior to its adoption of CECL (pre-CECL amount); and

(2) the FICU’s balance sheet amount as of the beginning of the fiscal year in which the FICU adopts CECL (post-CECL amount).

The 3-year phase-in amount is the difference between the pre-CECL and post-CECL amounts of retained earnings. NCUA will phase-in the CECL transitional amount and make the adjustments for calculating a FICUs net worth ratio.

The Phase-In

FICUs are required to begin implementation of the CECL for fiscal years beginning after December 15, 2022. In the first 3 reporting quarters once CECL commences, NCUA will deem retained earnings and total assets as reported on the 5300 to be increased by 100% of the FICU’s CECL transitional amount. During this period, FICUs should build capital and may make resulting adjustments to their CECL transitional amount.

The NCUA will base subsequent phase-in calculations on the CECL transitional amount reported by the FICU as of the 4Q of the fiscal year of CECL adoption. Beginning with the 4th reporting quarter NCUA will deem retained earnings and total assets to be increased by 67% of the FICU’s CECL transitional amount. In the 4Q of year 2, this percentage will be decreased to 33%.

Commencing with the 12Q after adoption, A FICU’s net worth ratio will completely reflect the day-one effects of CECL.

NCUA Oversight

While NCUA will use the phase-in adjustment to determine a FICU’s net worth ratio for PCA compliance, NCUA will continue to use traditional supervisory oversite to examine credit loss estimates and allowance balances regardless of whether the FICU is subject to the CECL transition provision. For FICUs phasing-in CECL, NCUA may also evaluate whether the FICU will have adequate amounts of capital at the expiration of the CECL transition period.

Credit Unions with less than $10 million in Assets and ALLL Methodology

Although the FCUA provides an exception for GAAP requirements for FICUs, NCUA’s    § 702.402 requires all FICUs make charges for loan losses in accordance with GAAP without exception. The final rule provides that FICUs with less than $10 million in total assets may make charges for loan losses either in accordance with GAAP or with any reasonable reserve methodology (incurred loss) provided it adequately covers known and probable loan losses.

Final Rule Summary: Derivatives (Parts 701, 703, 741, & 746)                

Prepared by NASCUS Legislative & Regulatory Affairs Department
June 2021

NCUA has issued a final rule amending its provisions related to Derivatives transactions. For SCUs, the only relevant provisions of NCUA Derivatives Rules is the requirement to notify NCUA within 5 business days of having engaged in the credit union’s first derivatives transaction, and the exemption from notification for transactions listed in §703.14. The notification requirement is in § 741.219.

The final Derivatives rule is effective June 25, 2021. The final rule may be read here.

Summary

Although the following provisions of NCUA’s Derivatives Rule do not apply to FISCUs, NASCUS provides a brief overview of the FCU rules for informational purposes.

  1. Asset Threshold – NCUA is now allowing FCUs with $500+ million in assets, and a composite CAMEL rating of “1” or “2” to exercise derivatives authority without pre-approval from NCUA. FCUs will less than $500 million in assets need NCUA pre-approval before engaging in derivatives transactions.FISCUs do not need NCUA pre-approval to engage in derivatives transactions. SCUs look to state law for authority to use derivatives.
  2. FCUs with $500+ million in assets, and FISCUs, will be required to notify NCUA within 5 business days of entering into their first derivatives transactions.This is a change from the previous advance notice requirement.SCUs need not notify NCUA of engaging in transactions listed in § 703.14.
  3. Collateral Requirements – The final rule requires specific collateral types for non-cleared derivatives. Approved collateral includes:
    • Cash (U.S. dollars)
    • U.S. Treasuries
    • GSE debt
    • U.S. government agency debt
    • GSE residential mortgage-backed security pass-through securities
    • U.S. agency residential mortgage-backed pass-through securities
  4. Counterparties – The final rule retains the current rule’s counterparty provisions. For exchange-traded and cleared Derivatives, approved counterparties include:
    1. Swap Dealers
    2. Introducing Brokers
    3. Futures Commission Merchants that are current registrants of the CFTCFor Non-cleared Derivatives, registered CFTC Swap Dealers will be permitted to be the Counterparty.
  5. Liquidity Review – FCUs will be required to establish a liquidity review process to analyze and measure potential liquidity needs related to its Derivatives program before executing the credit union’s first derivatives transaction.
  6. Maturity – FCUs are limited to a 15-year maturity limit for derivatives.
  7. Written Options – The current FCU derivatives rule prohibits use of written options. NCUA will now permit written options but is adding a requirement that FCU derivatives may only be entered into to manage IRR.
  8. Pipeline Management – The final rule streamlines the pipeline management provisions to allow FCUs to use derivatives to manage interest rate risk for all of a FCU’s portfolio.
  9. Regional Director Authority – The final rule delegates authority to the NCUA Regional Director to prohibit a FCU from continuing to engage in derivatives transactions based upon regulatory or supervisory concerns.
  10. Monthly Reporting – FCUs must submit to their boards detailed monthly reports on the credit union’s derivatives activity. NCUA’s rule prescribes the contents of the monthly reports as well as record retention requirements.
  11. Derivative Transactions with Commercial Borrowers – FCUs are prohibited from entering into interest rate swaps with commercial borrowers. Final § 703.104(b) requires all FCU derivative counterparties to be regulated by the CFTC, and NCUA deems it unlikely that a commercial borrower would be CGTC regulated. Therefore, the final explicitly prohibits commercial borrowers from being counterparties for FCUs.
  12. USD LIBOR – NCUA is, for now, requiring FCU derivative contracts be based on Domestic Interest Rates or the USD London Interbank Offered Rate (LIBOR). NCUA reevaluate this provision after the cessation of the USD LIBOR.
Letter to Credit Unions 21-CU-05 Interagency Statement on the Issuance of the AML/CFT National Priorities

July 2021 — NCUA issued LTCU 21-CU-05 to provide credit unions information on the issuance of AML/CFT National Priorities and subsequent obligations for BSA compliance programs. The Anti-Money Laundering Act of 2020 (AML Act) requires the Secretary of the Treasury to establish priorities for AML/CFT policy. Those priorities were issued on June 30, 2021. The AML Act also requires credit unions and other covered entities to incorporate those priorities into their individual compliance programs once the federal banking agencies promulgate rules addressing the newly published priorities.

Specifically, NCUA informs credit unions:

  • NCUA plans to revise its BSA regulations, as necessary, to address how the AML/CFT Priorities will be incorporated into credit unions’ BSA requirements.
  • Credit unions are not required to incorporate the AML/CFT Priorities into their BSA compliance programs until the effective date of a final revised regulation. However, credit unions may wish to begin considering how the priorities could be incorporated into compliance programs.
  • NCUA examiners will not examine for incorporation of AML/CFT Priorities into BSA compliance programs until a final regulation implementing the AML/CFT Priorities becomes effective.

Legal Opinion 21-3500 Proposed Capital Markets Funding Program for Credit Unions

April 23, 2021

NCUA issued Legal Opinion 21-3500 to address issues related to a credit union funding program in which limited liability companies (LLCs) purchase share certificates from various federally insured credit unions (FICUs) where they are either members or otherwise eligible to maintain NCUA insured accounts. Under the proposed program, a given LLC would purchase a share certificate worth a maximum of $250,000, the standard maximum share insurance amount (SMSIA), at one or more FICUs.

Although NCUA was asked to confirm that each LLC’s account at the various FICUs was insured to the SMSIA, the GC responds that specific share insurance coverage will always be fact specific and predicated upon the individual or entity meeting all applicable requirements. NCUA’s GC did provide an overview of the issues involved in determining whether the LLCs would receive the SMSIA (share insurance coverage up to the $250k maximum).

In general, accounts held by entities such as an LLC are insured up to the SMSIA of $250,000 if they are engaged in an independent activity. NCUA notes that as long an LLC is engaged in “an activity other than one directed solely at increasing insurance coverage” the LLC will be found to be engaged in an independent activity and therefore qualify for maximum share insurance coverage.

NCUA was also asked if each LLC depositor in the proposed program at a single FICU would receive separate maximum share insurance coverage and not have their separate accounts aggregated for coverage purposes.

NCUA’s GC again noted that the answer would be fact specific, but also confirmed that in general, separate legal entities that are engaged in independent activities and are the true owners of the funds in the account they maintain are eligible to receive coverage up to the SMSIA.

In closing, the GC stressed that for an LLC to receive coverage, it must legally own the funds in the account and be a member of the FICU or otherwise qualify to maintain an insured account at the FICU.

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Final Rule Summary: Capitalization of Interest (Parts 741) 

Prepared by NASCUS Legislative & Regulatory Affairs Department
June 2021

NCUA has issued a final rule lifting the Part 741 Appendix B prohibition on the capitalization of interest in connection with loan workouts and modifications. The final rule also establishes documentation requirements to help ensure that the addition of unpaid interest to the principal balance of a mortgage loan does not hinder the borrower’s ability to become current on the loan. In addition, NCUA has made several technical changes to the existing regulation intended to improve clarity.

The final rule applies to all federally insured credit unions (FICUs).

The final Capitalization on Interest rule is effective 30 days after publication in the Federal Register. The rule may be read in its entirety here.

Summary

A May 3, 2012, NCUA rule established loan workout and monitoring requirements applicable to all FICUs, including mandating that FICUs have written policies addressing loan workouts and nonaccrual practices and prohibiting additional advances to a borrower to finance unpaid interest (capitalization of interest) and credit union fees and commissions. Under the 2012 rule, FICUs were permitted to advance funds to cover 3rd-party fees, such as force-placed insurance and property taxes.

In lifting the prohibition against capitalization of interest, NCUA cites both FICUs need for greater flexibility to work with borrowers adversely impacted by the pandemic as well as the fact that while the federal banking agencies provide guidance to banks on the practice, the agencies do not prohibit financing of unpaid interest.

The Final Rule

  • Prohibition on Capitalization of Interest Removed Indefinitely – § 741, Appendix B, is amended to permit FICUs to capitalize interest in connection with loan workouts and modifications. While this change applies to workouts of all types of loans (including commercial and business loans); it only applies to loan modifications.
  • Capitalization of Interest Defined – Appendix B will define capitalization of interest as constituting the addition of accrued but unpaid interest to the principal balance of a loan.
  • Capitalizing FICU Fees and Commissions is Still Prohibited – While the final rule amends Appendix B to allow capitalization of interest, FICUs are still prohibited from capitalizing their owns fees and commission. However, funds may be advanced to cover 3rd party fees to protect loan collateral (such as force placed insurance or property taxes).
  • Consumer Protection – NCUA is maintaining several Appendix B requirements that apply to all loan workout policies to provide consumer protection guardrails. For example:
    • NCUA expects that loan workouts will balance the best interests of the FICU and the borrower.
    • A FICU’s policy must establish limits on the number of modifications allowed for an individual loan and must ensure that loan workout decisions are based on a borrower’s renewed willingness and ability to repay.
    • FICUs must maintain sufficient documentation to demonstrate that the new terms were communicated to the borrower; that the borrower agreed to pay the loan in full under the new terms; and, most importantly, that the borrower can repay the loan under the new terms.

NCUA also notes that if a FICU restructures a loan more frequently than once a year or twice in five years, examiners will have higher expectations for the documentation of the borrower’s renewed willingness and ability to repay the loan. If a FICU engages in multiple restructurings, examiners will request validation documentation regarding collectability of the loan.

  • New Loan Modification Policy Requirements – For FICUs that capitalize interest, NCUA has added new requirements for loan modification policies:
    • The policy must require compliance with all applicable consumer protection laws and regulations, including the ECOA, the Fair Housing Act, TILA, RESPA, FCRA, CFPB’s UDAP prohibitions, and any applicable state laws (that in some cases may be more stringent than federal law).
    • Documentation must reflect a borrower’s ability to repay and sources of funds for repayment. Documentation must also reflect, as appropriate, compliance with the FICU’s valuation policies at the time the modification is approved.
    • Borrowers must be provided with documentation that is accurate, clear, and conspicuous and consistent with Federal and state consumer protection laws.
    • Loan status for modified loans must be reported in accordance with applicable law and accounting practices. Modified loans should not be reported as past due if the loan was current prior to modification and the borrower is complying with the terms of the modification.

Specifically, Appendix B requires FICUs maintain prudent policies and procedures that both 1) help borrowers resume appropriately restructured payments (payments that are affordable and sustainable); and 2) minimizing losses to the credit union. The prudent policies and procedures must consider:

    • Whether the loan modifications are well-designed, consistently applied, and provide a favorable outcome for borrowers.
    • The available options for borrowers to repay any missed payments at the end of their modifications to avoid delinquencies or other adverse consequences.
    • Appropriate safety and soundness safeguards to prevent the following:
      • Masking deteriorations in loan portfolio quality and understating charge-off levels;
      • Delaying loss recognition resulting in an understated ALLL account or inaccurate loan valuations;
      • Overstating net income and net worth (regulatory capital) levels;
      • Circumventing internal controls.
  • Technical Updates to Appendix B – NCUA also made several technical updates to Appendix B intended to improve the rule’s clarity and update certain references. Examples of these technical changes include:
    • Clarifying that Appendix B is a mandatory regulatory requirement rather than guidance. For example, current Appendix B uses both the mandatory “should” while also referring to certain provisions, inaccurately, as “guidance.” References to the Appendix as “guidance” are being removed.
    • Updating references to other guidance in the Appendix. For example, the final rule updates references to the NCUA’s or other guidance in the Appendix such a conform the FASB reference in the Appendix to changes made by FASB to its guidance.
    • Conform terminology to current usage. For example, NCUA now uses the term commercial lending rather member business lending.

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21-RA-06 CFPB Delays Mandatory Compliance Date of General Qualified Mortgage (QM) Final Rule Under Truth in Lending Act

June 2021

Earlier this year, NCUA issued Regulatory Alert 21-RA-01 to provide credit unions information on CFPB changes to the ATR/QM Rule made in December 2020. However, in April, 2021, CFPB issued a final rule amending TILA’s Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule). This new final rule makes changes to provisions covered in 21-RA-01. NCUA issued Regulatory Alert 21-RA-06 to address these changes.

The April final rule from the CFPB made changes to 2 QM loans:

  •  General QMs (12 CFR 1026.43)

 The December 2020 QM Rule amended Reg Z by replacing the General QM loan definition of debt-to-income (DTI) limit with a limit based on loan pricing and making other changes to the General QM loan definition. These changes took effect on March 1, 2021 (with mandatory compliance starting July 1, 2021).

Under the April 2021 final rule, mandatory compliance is extended from July 1, 2021 until October 1, 2022. In addition, a lender can use either the original underwriting process (with the 43% DTI limit) or the new underwriting process (with price-based thresholds) for applications received from March 1, 2021, to September 30, 2022.

Lenders must use the revised General QM loan definition for applications received on or after October 1, 2022.

  •  Temporary GSE QMs (12 CFR 1026.43)

 Temporary GSE QMs are eligible to be purchased or guaranteed by either the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation (the GSEs), while operating under the conservatorship or receivership of the FHFA. A 2020 rule limited the Temporary GSE QM loan definition to covered transactions for which the lender receives the consumer’s application before the mandatory compliance date of the General QM Final Rule (Jul1, 2021).

Under the April 2021 final rule, the Temporary GSE QM loan definition now expires upon the earlier of October 1, 2022, or the date the applicable GSE exits federal conservatorship. This is known as “the GSE Patch.”

For additional information, see the CFPB’s compliance guide and other resources.

21-RA-07 Equal Credit Opportunity Act (Regulation B)

June 2021

NCUA’s Regulatory Alert 21-RA-07 discusses the CFPB’s March 2021 interpretive rule clarifying the scope of  the prohibition against sex discrimination in the Equal Credit Opportunity Act (ECOA) (Reg B). The interpretive rule became effective March 16, 2021.

The interpretive rule clarifies that ECOA and Reg B cover discrimination against individuals, not merely groups, and states that sex discrimination includes discrimination motivated by actual or perceived non-conformity with sex or gender-based stereotypes (for example, discriminating against an applicant because the customer’s attire does not accord with the customer’s perceived gender).

Noting that some state laws also prohibit discrimination in credit transactions based on sexual orientation or gender identity, NCUA instructs credit unions to ensure their policies, procedures, and training materials promote compliance with ECOA and Reg B. NCUA also urges credit unions to review automated scoring, decisioning, and pricing models for variables that could be proxies for prohibited bases of discrimination.

The CFPB stated the interpretive rule is consistent with the 2020 United States Supreme Court ruling in Bostock v. Clayton County, Georgia, that holds the prohibition against sex discrimination in Title VII of the Civil Rights Act of 1964 encompasses sexual orientation discrimination and gender identity discrimination.

21-RA-06 CFPB Delays Mandatory Compliance Date of General Qualified Mortgage (QM) Final Rule Under Truth in Lending Act
June 2021

Earlier this year, NCUA issued Regulatory Alert 21-RA-01 to provide credit unions information on CFPB changes to the ATR/QM Rule made in December 2020. However, in April, 2021, CFPB issued a final rule amending TILA’s Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule). This new final rule makes changes to provisions covered in 21-RA-01. NCUA issued Regulatory Alert 21-RA-06 to address these changes.

The April final rule from the CFPB made changes to 2 QM loans:

  •  General QMs (12 CFR 1026.43)

 The December 2020 QM Rule amended Reg Z by replacing the General QM loan definition of debt-to-income (DTI) limit with a limit based on loan pricing and making other changes to the General QM loan definition. These changes took effect on March 1, 2021 (with mandatory compliance starting July 1, 2021).

Under the April 2021 final rule, mandatory compliance is extended from July 1, 2021 until October 1, 2022. In addition, a lender can use either the original underwriting process (with the 43% DTI limit) or the new underwriting process (with price-based thresholds) for applications received from March 1, 2021, to September 30, 2022.

Lenders must use the revised General QM loan definition for applications received on or after October 1, 2022.

  •  Temporary GSE QMs (12 CFR 1026.43)

Temporary GSE QMs are eligible to be purchased or guaranteed by either the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation (the GSEs), while operating under the conservatorship or receivership of the FHFA. A 2020 rule limited the Temporary GSE QM loan definition to covered transactions for which the lender receives the consumer’s application before the mandatory compliance date of the General QM Final Rule (Jul1, 2021).

Under the April 2021 final rule, the Temporary GSE QM loan definition now expires upon the earlier of October 1, 2022, or the date the applicable GSE exits federal conservatorship. This is known as “the GSE Patch.”

For additional information, see the CFPB’s compliance guide and other resources.

Letter to Credit Unions 21-CU-04 Renewal of PCA Relief
June 2021

NCUA issued LTCU 21-CU-04 to inform credit union of the agency’s renewal of regulatory relief related to PCA rules for adequately capitalized credit union earning retention and net-worth restoration plans (NWRPs) for qualifying undercapitalized credit unions. In response to the pandemic, NCUA issued the relief as an Interim Final Rule (IFR) on April 19, 2021. NASCUS’s summary of the IFR is available here.

The PCA relief being provided by NCUA was first issued in June 2020 and expired on December 31, 2020. Now, due to the continued impact of the pandemic, NCUA has renewed the relief thru March 31, 2022.

  • 702.201 – On April 26, 2021, the NCUA Board issued an Administrative Order waiving the earnings-retention requirement for adequately capitalized credit unions. Under this change, an adequately capitalized credit union that is unable to meet the earnings-retention requirement will not have to submit a written application requesting approval to decrease the amount of its earnings-retention requirement.
  • 702.206(c) – The second temporary change affects the submission of NWRPs by FICUs classified as undercapitalized predominantly because of share growth. Under this change, qualifying credit unions that experienced a decline in its net worth ratio due predominantly to temporary share growth may submit a streamlined NWRP. The streamlined NWRP would include an attestation by the credit union that the reduction in the net worth ratio was caused by share growth and that such share growth is a temporary condition due to COVID-19. Credit unions should also include the anticipated duration of the share growth and any actions the credit union plans to take to address its net worth ratio decline.
Request for Information & Comment: Extent to Which Model Risk Management Principles Support Compliance with BSA/AML & OFAC

Prepared by NASCUS Legislative & Regulatory Affairs Department
May 2021

On April 9, 2021, the Federal Reserve, FDIC, and OCC, issued an Interagency Statement on Model Risk Management for Bank Systems Supporting Bank Secrecy Act/Anti-Money Laundering Compliance (Model Risk Management Guidance or MRMG). The federal banking agencies consulted with both FinCEN and NCUA before issuing the MRMG, but NCUA did not join in issuing the MRMG and it does not apply to credit unions.

Now, however, NCUA is joining the federal banking agencies in issuing a Request for Information (RFI) seeking comments and feedback on the extent to which the principles discussed in the MRMG support compliance by banks and credit unions with BSA/ AML laws and regulations. The RFI also seeks feedback on the extent to which the MRMG principles support compliance by bank and credit unions related to models and systems used in connection with OFAC requirements.

Comments must be received on or before June 11, 2021. The Request for Comment may be read in its entirety here.

Summary

The MRMG lays out principles for sound model risk management (MRM) in three key areas:

  • Model development, implementation, and use;
  • Model validation; and
  • Governance, policies, and controls.

The guidance describes different MRM responsibilities for different parties within a bank, based on their roles, including those building the models, those independently reviewing the models, and those providing a governance framework for MRM. The RFI, in which NCUA is participating, seeks information and comment on any aspects of the application of the principles conveyed in the MRMG to BSA/AML/OFAC compliance and whether the principles outlined in the MRMG supports compliance.

In addition to any general comments, NCUA and the banking agencies specifically seek feedback on the following 12 questions:

  1. Question: What types of systems do institutions employ to support BSA/AML and OFAC compliance that they consider models (e.g., automated account/transaction monitoring, interdiction, customer risk rating/scoring)? What types of methodologies or technologies do these systems use (e.g., judgment-based, artificial intelligence or machine learning, or statistical methodologies or technologies)?
  2. Question:
    To what extent are institutions’ BSA/ AML and OFAC models subject to separate internal oversight for MRM in addition to the normal BSA/AML or OFAC compliance requirements? What additional procedures do institutions have for BSA and OFAC models beyond BSA/ AML or OFAC compliance requirements?
  3. Question:
    To what extent do institutions have policies and procedures, either specific to BSA/AML and OFAC models or applicable to models generally, governing the validation of BSA/AML and OFAC models, including, but not limited to, the validation frequency, minimum standards, and areas of coverage (i.e., which scenarios, thresholds, or components of the model to cover)?

  4. Question:
    To what extent are the risk management principles discussed in the MRMG appropriate for BSA/AML and OFAC models? Please explain why certain principles may be more, or less, appropriate for institutions of varying size and complexity? Are there other principles not discussed in the MRMG that would be appropriate to consider?
  5. Question:
    Some bankers have reported that banks’ application of MRM to BSA/AML and OFAC models has resulted in substantial delays in implementing, updating, and improving systems. Please describe any factors that might create such delays, including specific examples.

  6. Question:
    Some bankers have reported that banks’ application of MRM to BSA/AML and OFAC models has been an impediment to developing and implementing more innovative and effective approaches to BSA/AML and OFAC compliance. Is MRM, relative to BSA/AML, an impediment to innovation? If yes, please describe the factors that create the impediments.

  7. Question:
    To what extent do institutions’ MRM frameworks include testing and validation processes that are more extensive than reviews conducted to meet the independent testing requirement of the BSA? Please explain.

  8. Question:
    To what extent do institutions use an outside party to perform validations of BSA/AML and OFAC compliance systems? Does the validation only include BSA/AML and OFAC models, as opposed to other types of models used by the institution? Why are outside parties used to perform validation?

  9. Question:
    To what extent do institutions employ internally developed BSA/AML or OFAC compliance systems, third-party systems, or both? What challenges arise with such systems considering the principles discussed in the MRMG? Are there challenges that are unique to any one of these systems?

  10. Question:
    To what extent do institutions’ MRM frameworks apply to all models, including BSA/AML and OFAC models? Why or why not?
  11. Questions:
    a) The following question all related to suspicious activity monitoring systems:

    1. To what extent do institutions validate such systems before implementation?
    2. Are institutions able to implement changes without fully validating such systems? If so, please describe the circumstances.
    3. How frequently do institutions validate after implementation?
    4. To what extent do institutions validate after implementing changes to existing systems (e.g., new scenarios, threshold changes, or adding/changing customer peers or segments)? Please describe the circumstances in which you think this would be appropriate.
    5. How do institutions validate such systems?
    6. What, if any, compensating controls do institutions use if they have not had an opportunity to validate such systems?

    (b) Suspicious activity monitoring system benchmarking:

    What, if any, external or internal data or models do institutions use to compare their suspicious activity systems’ inputs and outputs for purposes of benchmarking?

    (c) Suspicious activity monitoring system back-testing:

    How do institutions attempt to compare outcomes from suspicious activity systems with actual outcomes, given that law enforcement outcomes are often unknown?

    (d) Suspicious activity monitoring system sensitivity analysis:

    How do institutions check the impact of changes to inputs, assumptions, or other factors in their systems to ensure they fall within an expected range?

  12. Question:
    To what extent do institutions calibrate the scope and frequency of MRM testing and validation models based on their materiality? How do they do so?