NCUA Final Rule Summary

Part 701 and Part 741

Public Unit and Nonmember Shares

Prepared by NASCUS Legislative & Regulatory Affairs Department

November 2019

 NCUA has published a final rule amending its regulations in Part 701.32(b) limiting public unit and non-member deposits in federally insured credit unions (FICUs). These rules apply to federally insured state credit unions (FISCUs) by reference in §741.204.

The final rule:

• Raises the limit on public unit and non-member shares to 50% of the credit union’s paid-in and unimpaired capital and surplus less any public unit and non-member shares
• Eliminate the waiver process for deposits in excess of the new limit
• Require an FICUs to develop and maintain a written plan if its public unit and non-member shares, taken together with borrowings, exceed 70% of paid-in and unimpaired capital and surplus

The final rule may be read here. The final rule is effective January 29, 2020.

NASCUS note:: For FISCUs, NCUA’s rule serves as a limit only on the amount of non-member and public unit deposits that may be held as a share insurance matter. NCUA’s rule does not give FISCUs the authority to hold these accounts. The authority to for a FISCU to hold non-member shares or public unit deposits is a matter of state law.

Summary

Part 701 addresses two distinct issues:

• Deposits from non-members
• Deposits from public units, whether members or not

Federal credit unions, and many FISCUs, are authorized to accept deposits from certain non-members. In some cases, they are permitted to accept deposits from public units regardless of whether the public unit is a member of the credit union. In other cases, low income designated credit unions may accept deposits from non-members.

The final rule establishes limits on the amounts of BOTH public deposits and non-member deposits that me be held in a FICU.

Limits on the Amount of Public Deposits and Non-member deposits

NCUA’s limit on public unit deposits does not distinguish between deposits from a public unit that is a member of the credit union or deposits from a non-member public unit.

• The final rule provides that a FICU may receive public unit and nonmember shares in an amount up to 50% of the FICU’s net amount of paid-in and unimpaired capital and surplus less any public unit and nonmember shares.

Alternative Threshold $3 million

For smaller credit unions, where 50% of paid in capital would not provide sufficient capacity, NCUA has preserved the option for a credit union accept non-member and public deposits up to $3 million if that amount is greater than 50% of the FICU’s net amount of paid-in and unimpaired capital and surplus less any public unit and nonmember shares.

Waivers

NCUA’s final rule eliminates the §701.32(b) waiver provisions that had allowed a credit union to seek a higher limit of non-member and public deposits from the NCUA Regional Director. With the new higher limit, NCUA does not believe there is a need for credit unions to seek a waiver above the 50% threshold.

Plan Regarding Use of Funds

The final rule requires a FICU to develop a plan regarding the intended use of any borrowings, public unit, or nonmember shares that, taken together, exceed 70% of paid-in and unimpaired capital and surplus. Credit unions will not be required to submit plans to NCUA for approval. Rather, NCUA will review plans during the normal course of examination.

 

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NCUA Final Rule

 Part 715 Supervisory Committee Audits and Verifications (By reference in §741.6 and §741.202)

Summary

Prepared by NASCUS Legislative & Regulatory Affairs Department

September 2019

NCUA has published a final rule amending its rules regarding required audits and account verifications for federally insured credit unions. NCUA’s audit rules are found in NCUA’s Rules and Regulations Part 715. For federally insured state credit unions (FISCUs), Part 715 is referenced in Parts 741.6 and 741.202.

NCUA’s final rule:

• Replaces the existing NCUA Supervisory Committee Guide with an expanded Appendix to § 715;
• Replaces the references to “federal credit unions” with “federally insured credit union”;
• Eliminates the specific deadline for the outside audit to be delivered to the credit union;
• Eliminates the Report on Examination of Internal Controls over Call Reporting [§715.7(b)] and the Balance Sheet Audit option [§715.7(a)] options

 NCUA’s final rule may be read here. The rule will be effective 90 days after publication in the Federal Register.  

 Summary

• Eliminating 2 alternatives to a financial statement audit

The final rule eliminates 2 options credit unions with less than $500 million in assets could use to meet the audit requirements of § 715. The first alternative allowed qualifying credit unions to obtain a Report on Examination of Internal Controls Over Call Reporting. However, NCUA noted that less than 1% of credit unions availed themselves of this option and therefore have eliminated it to streamline their rules and regulations.

Under the old § 715, credit unions with less than $500 million also had the option of performing a Balance Sheet Audit. NCUA is eliminating this option as well because a Balance Sheet Audit does not cover the credit union’s income statement nor does it reflect the current value of the credit union’s assets.

• Eliminate the Supervisory Committee Guide

NCUA will replace the Supervisory Committee Guide with an Appendix covering minimum supervisory committee audit requirements or outside auditor requirements when a qualifying credit union chooses an alternative to financial statement audit. The new Appendix will require the following minimum procedures:

• Review Board of Director minutes to determine whether there are any material changes to the credit union’s activities or condition that are relevant to the areas to be reviewed in the audit
• Test and confirm material asset and liability accounts including, at a minimum:
• Loans
• Cash on deposit
• Investments
• Shares
• Borrowings
• Test material equity, income, and expense accounts
• Test for unrecorded liabilities
• Review key internal controls including, at a minimum:
• Bank reconciliation procedures
• Cash controls
• Dormant account controls
• Wire and ACH transfer controls
• Loan approval and disbursement procedures
• Controls over accounts of employees and officials
• Other real estate owned
• Foreclosed and repossessed assets 28
• Test the mathematical accuracy of the ALLL account and ensure the methodology is properly applied
• Test loan delinquency and charge-offs

Note: While not expressly included in the new § 715 Appendix, NCUA states in the preamble to the final rule that the “supervisory committee audit must test employee and board compensation when it is a significant component of a FICU’s expenses – as the regulation requires the audit to include a test of “material equity, income, and expense accounts.” See page 13 of NCUA’s Board Action Memorandum on the final rule.

• Assistance from Outside, Compensated Person

NCUA has eliminated the current regulations requirement that an engagement letter specify a target date of delivery of written audit reports “not to exceed 120 days from the date of calendar or fiscal year-end under audit.” The new rule § 715.9(c)(6) will require that the retention letter with the outside auditor specify the delivery date of written reports so the credit union may meet its annual audit requirement.

 

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NASCUS Summary

Proposed IRPS 19-1

Exceptions to Employment Restrictions Under Section 205(d) of the FCUA (‘‘Second Chance IRPS’’)

Prepared by NASCUS Legislative & Regulatory Affairs Department

September 2019

NCUA is proposing to issue a new Interpretive Ruling and Policy Statement (IRPS 19-1) to replace existing IRPS 08-1 regarding statutory prohibitions imposed by § 205(d) of the Federal Credit Union Act (FCUA) prohibiting individuals who have been convicted of crimes involving dishonesty from participating in the affairs of a federally insured credit union. Specifically, NCUA is proposing to remove from the list of disqualifying offenses:

• insufficient funds checks of aggregate moderate value
• small dollar simple theft
• false identification
• simple drug possession
• “isolated minor offenses” committed by covered persons as young adults

The proposed IRPS 19-1 may be read here in its entirety. The proposal applies to both federal credit unions and federally insured state credit unions.

Comments are due to NCUA by September 27, 2019.

Summary

Section 205(d) of the FCUA prohibits a person 1) convicted of any criminal offense involving dishonesty or breach of trust, or 2) who has entered into a pretrial diversion or similar program in connection with a prosecution for such offense, from participating in the conduct of the affairs of an insured credit union without the prior written consent of the NCUA Board. Existing IRPS 08–1 provides direction and guidance to credit unions and the public and establishes procedures for applying to the NCUA Board for written consent on a case-by-case basis.

NCUA notes that recently several cases before the Board involved offenses that while technically minor, did not qualify for the existing de minimis exceptions established in IRPS 08-1. NCUA is also mindful of recent updates to § 19 prohibitions administered by the Federal Deposit Insurance Corporation. As a result, NCUA proposes the following changes to its administration of the FCUA §205 prohibitions.

• Covered Persons

The FCUA prohibitions apply to “institution affiliated parties” and others “who are participants in the conduct of the affairs of an insured credit union.” The current IRPS considers independent contractors to be “instituted affiliated parties” if “they knowingly or recklessly participate in violations, unsafe or unsound practices or breaches of fiduciary duty which are likely to cause significant loss to, or a significant adverse effect on, an insured credit union.” NCUA believes this definition is confusing.

• Proposed IRPS 19-1 would clarify that an independent contractor is a covered person if the contractor influences or controls the management or affairs of the credit union.

In addition, a person who does not meet the definition of an “institution affiliated party” might also be prohibited by § 205 if he or she is participating in the conduct of the affairs of a credit union. Currently, the NCUA does not define “participation in the conduct of the affairs of a credit union.” Instead, NCUA analyzes this on a case-by-case basis.

• Proposed IRPS 19– 1 will maintain NCUA’s current position that cases will be evaluated upon the degree of influence or control over the management or affairs of the credit union exercised by the party in question.
• Covered Offenses

Under the proposed IRPS, the underlying case, and any sentencing, must be fully resolved and sentence completed prior to an applicant seeking NCUA Board consent.

• De minimis Offenses

The exception for de minimis offenses would be updated and expanded. IRPS 19-1 would continue the current policy that application to NCUA is not required for de minimis offenses.

Under the current rule a covered offense is considered de minimis if it meets all 5 of the following five criteria:

(1) single conviction or entry into a pretrial diversion program for a covered offense

(2) the offense was punishable by imprisonment for a term of < 1 year and/or a fine of < $1,000, & the punishment imposed by the court did not include incarceration

(3) the conviction/pretrial diversion began at least 5 years prior to application to NCUA (4) the offense did not involve an insured depository institution or insured credit union (5) the Board or any other Federal financial institution regulatory agency has not previously denied consent under Section 205(d) of the FCU Act or Section 19 of the FDIA

Proposed IRPS 19–1 would modify criterion #2 to allow the following offenses to meet that de minimis criterion:

• those punishable by imprisonment for a term of one year or less and/or a fine of $2,500 or less
• those punishable by three days or less of jail time

The Proposed IRPS would define ‘‘jail time’’ to include any significant restraint on an individual’s freedom of movement, including confinement to a specific facility or building on a continuous basis where the person may leave temporarily only to perform specific functions or during specified time periods or both.

NCUA is also proposing expanding the scope of the de minimis exception by eliminating the need to apply for certain low-risk, isolated offenses. The following criteria, if met, would qualify for the de minimis exception without having to apply to NCUA:

• Age-based exception – A person with a covered conviction that occurred when the individual was 21 years of age or younger at the time of conviction and who otherwise meets the de minimis criteria, will qualify for the exception if:
• The conviction or program entry was entered at least 30 months prior to the date an application would otherwise be required; and
• all sentencing or program requirements were met prior to the date an application would otherwise be required.
• Insufficient funds checks – A conviction or pretrial diversion for writing of ‘‘bad’’ check(s) will be considered a de minimis offense and will not be considered as having involved an insured depository institution or insured credit union if:
• There is no other conviction or pretrial diversion program entry subject to Section 205(d);
• the aggregate total face value of all ‘‘bad’’ check(s) cited across all the conviction(s) is $1,000 or less; and
• no insured depository institution or insured credit union was a payee on any of the ‘‘bad’’ checks that were the basis of the conviction(s)
• Simple theft/petty crime – A conviction for simple theft of goods, services and/or currency (or other monetary instrument) such as shoplifting would be considered de minimis if the following conditions are met:
• The aggregate value of the currency, goods, and/or services taken was $500 or less at the time of conviction; and
• the person has no other § 205 conviction;
• it has been 5 years since the conviction (or 30 months in the case of a person 21 years or younger at the time of the conviction); and
• it did not involve an insured depository institution or insured credit union

For purposes of the exception, simple theft does not include the offenses of burglary, forgery, robbery, identity theft, or fraud. These crimes would continue to require an application for the Board’s consent, unless otherwise qualifying as de minimis.

• Use of a fake ID – The use of a fake, false, or altered identification card by a person under the legal age to obtain or purchase alcohol, or to enter a premises where alcohol is served and age appropriate identification is required, would be considered de minimis, provided there is no other conviction for the offense.
• Misdemeanor drug possession – Drug related convictions meeting the following conditions would be considered de minimis:
• The person has no other conviction described in § Section 205(d);
• the single conviction for simple possession of a controlled substance was classified as a misdemeanor and did not involve the illegal distribution (including an intent to distribute), sale, trafficking, or manufacture of a controlled substance or other related offense; and
• it has been 5 years since the conviction (or 30 months in the case of a person 21 years or younger at the time of the conviction)

Convictions for intent to distribute, illegal distribution, illegal sale or trafficking of a controlled substance, or illegal manufacture of a controlled substance would continue to require an application for the Board’s consent, unless otherwise qualifying as de minimis.

• Fidelity Bond

Proposed IRPS 19–1 would continue to require that any person who meets the de minimis criteria must be covered by a fidelity bond to the same extent as other employees in a similar position. In addition, that person must disclose the presence of the conviction or pretrial diversion program entry to all insured credit unions or insured depository institutions in the affairs of which he or she intends to participate.

No conviction or pretrial diversion program entry for a violation of the Title 18 sections set out in 12 U.S.C. 1785(d)(2) can qualify under any of the de minimis exceptions.

• Expunged convictions

A conviction that has been ‘‘completely expunged’’ is not considered a conviction of record and will not require an application for the NCUA Board’s consent under Section 205(d). Proposed IRPS 19–1 would clarify that if an order of expungement has been issued in regard to a conviction and is intended by the language in the order itself, or in the legislative provisions under which the order was issued, to be a complete expungement, then the jurisdiction, either in the order or the underlying legislative provisions, cannot allow the conviction or program entry to be used for any subsequent purpose. In addition, the failure to destroy or seal the records would not prevent the expungement from being considered complete for purposes of Section 205(d).

• Duty Imposed on Credit Unions

Proposed IRPS 19–1 would clarify that when a credit union learns that a prospective employee has a prior conviction for a de minimis offense, the credit union should document in its files that an application was and that the offense met the criteria for an exception.

The proposal would also allow for extensions of conditional offers of employment to prospective employees requiring the Board’s consent under Section 205(d). If a conditional offer is extended, however, the job applicant may not commence work for or be employed by the credit union until the applicant is determined to not be barred under Section 205(d) or receives consent from the Board.

• Procedures for Requesting the Board’s Consent Under § 205(d)

While proposed IRPS 19–1 would not modify the current procedures for requesting the Board’s consent under Section 205(d), it would distinguish between 1) a credit union-sponsored application filed by the institution on behalf of a covered individual and 2) an individual application filed on a covered person’s own behalf.

• The application form for requesting NCUA consent would be revised to more clearly distinguish between the two types of applications and the supporting information required for each.
• Proposed IRPS 19-1 would clarify that the appropriate regional office for submission of a credit union-sponsored application is the program office that oversees the credit union (the credit union’s Regional Office or ONES)

NCUA also seeks comment on whether delegating responsibility for reviewing certain applications could further streamline the application process and reduce burdens on credit unions and applicants.

 

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Final Rule Summary

Part 713 and Part 704 Fidelity Bond Coverage (741.201)

Prepared by NASCUS Legislative & Regulatory Affairs Department

August 2019

 NCUA has finalized amendments to Part 713 and Part 704 regarding fidelity bond coverage for natural person and corporate credit unions. Part 713 applies to federally insured state-chartered credit unions (FISCUs) by reference in Part 741.201.

The final rule may be read here. The rule is effective October 22, 2019.

Summary

The Federal Credit Union Act (FCUA) requires credit unions to maintain fidelity bond coverage for certain employees and officials. NCUA’s Part 713 implements fidelity bond coverage for natural person federal credit unions (FCUs) and federally insured state credit unions (FISCUs) by way of reference in Part 741.201. Part 704 implements fidelity bond coverage for all corporate credit unions (by way of reference in Part 741.206). In general, Parts 713 and 704 establish:

• Requirements for fidelity bond coverage
• Acceptable bond forms
• Minimum permissible coverage
• Obligation of board of directors to annually review adequacy of the bond coverage
• Corporate credit union deductible thresholds

In addition to NCUA’s rules, a 2017 Legal Opinion issued by NCUA’s General Counsel reversed longstanding prohibitions against a credit union purchasing a single bond policy that covered the credit union and its CUSOs.

NCUA has now issued new final fidelity bond rules for natural person and corporate credit uni0ns. Among the changes discussed in more detail below, NCUA has now extended virtually ALL of Part 713 to FISCUs.

Part 713.1 What is the scope of this section?

The final rule added “federally insured credit unions” as the new term for which credit unions are covered by the rule. Previously, the rule only referred directly to FCUs. The new rule also includes references to §741.201 the controlling provision for natural person FISCUs and for §704.18, the corporate credit union provision establishing fidelity bond requirements.

• 713.2 What are the responsibilities of a federally insured credit union’s board of directors under this section?

The final rule divides old § 713.2 into two sections. Subsection (a) retains the existing requirement that the credit union’s board review the amount of bond coverage carried by the credit union each year to ensure it is adequate given the credit union’s risk profile. New subsection (b) requires:

• The credit union’s board of directors review the application for purchase or renewal of the fidelity bond contract
• When the board approves an application for purchase or renewal, the board must pass a resolution of approval
• One member of the board, who is not an employee of the credit union, must sign the purchase or renewal agreement and all attachments

Part 713.2(b) also requires that the credit union alternate the board member signatory to the bond contract prohibiting the same board member from signing consecutive contracts. The

713.3 What bond coverage must a federally insured credit union have?

The final rule expanded and reorganized existing § 713.3. The current requirements that credit unions purchase an individual policy from a certified company that covers fraud and dishonesty are retained. A new requirement mandates that all bond agreements include a provision extending the discovery period for a covered loss:

• for at least one year after a involuntary liquidation
• for at least 4 months in the case of a voluntary liquidation

Part 713.2 also “codifies” NCUA’s 2017 Legal Opinion allowing a credit union to have a fidelity bond that also covers its CUSOs provided:

• the credit union owns 50% of the CUSO; or
• the CUSO is organized by the credit union to handle certain of the credit union’s business transactions and all the CUSO’s employees are employees of the credit union

It is important to note however that the final rule DOES NOT eliminate the prohibition against a single bond policy covering the credit union as well as other entities it does not majority own.

• 713.4 What bond forms may a federally insured credit union use?

NCUA has also reorganized § 713.4 and clarified its treatment of bond forms. The final rule retains the requirement for NCUA to review all bond forms before a credit union may use them and as well as NCUA’s retention of approved forms on the NCUA website for ease of credit union access. Part 713.4(c) prohibits credit unions from using any o fht following without first receiving NCUA approval:

• any bond form that has been amended or changed since the time the NCUA Board approved the form
• any rider, endorsement, renewal, or other document that limits coverage of approved bond forms.

NCUA has created a new sunset provision in § 713.4(d) establishing that approvals of all bond forms expire every 10 years from the date of NCUA approval or reapproval. All bond forms approved by NCUA prior to 2019 will expire on January 1, 2029. NCUA also reserved the right to review any given bond form at any time without regard to the 10-year sunset.

In the preamble to the final rule, NCUA notes that should it disapprove a bond form currently in use by a credit union, it would not require the credit union to -recontract immediately on an approved form, but rather would expect the credit union to use an approved form upon the end of the term of the disapproved form’s contract.

Part 704.18 Corporate Credit Unions Fidelity Bond

• Board review of bond coverage

The provision implementing the board review of the bond application, the signature of a board member, and the continued requirement for annual review of coverage amounts is codified in § 704.18(b).

• NCUA approval of bond forms

The provisions implementing NCUA’s approval of bond froms, the requirement for coverage of fraud and dishonesty, the prohibition on use of amended forms unless approved by NCUA and the 10-year sunset are codified in §704.18(c).

• Extended discovery period

Part 704.18(c)(4) contains the requirements for the extended discovery periods.

• Written Notice by the surety

The corporate credit union bond provision contains a unique provision not applicable to natural person credit unions. Part 704.18(c)(5) requires written notice to NCUA from the surety when the fidelity bond of a credit union or individual is terminated or when a deductible is increased above the limits set by NCUA. The written notice must be accompanied by a brief statement of cause for the termination or increase in deductible.

 

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19-RA-02 Serving Hemp Businesses

August 2019

NCUA has issued “interim guidance” for credit unions interested in serving the legalized hemp industry. The guidance will be updated as needed as necessary regulations are issued by the United States Department of Agriculture (USDA) and others regarding the growth, processing, manufacture, and retail sale of hemp. The change in federal law results from the 2018 Farm Bill removing hemp from Schedule I of the Controlled Substances Act (signed into law on December 20, 2018).

Background

The 2018 Farm Bill defines hemp as “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.”
Although hemp is no longer a controlled substance, whether any given hemp crop is being produced legally is a complicated matter involving the 2014 Farm Bill, the 2018 Farm Bill, pending USDA regulations and state law and state regulations.

• As of the date of this publication (August 2019) only industrial hemp produced pursuant to the 2014 Farm Bill is legal (for a good explainer, see here)
• For hemp to be legally produced pursuant to the 2018 Farm Bill, the USDA must issue regulations and guidelines implementing the 2018 Farm Bill hemp provisions (see USDA FAQ on hemp production issued July 2019)
• The USDA has issued a legal opinion interpreting the 2018 Farm Bill and establishing the need for implementing regulations.
• States and Tribal authorities may still prohibit, or more strictly regulate hemp production regardless of the pending USDA regulations, however States and Tribal Authorities may not prohibit the interstate transportation of hemp or hemp products grown or produced pursuant to the 2014 and/or 2018 Farm Bills.

NCUA’s guidance reminds credit unions that in addition to regulations related to hemp production, other hemp-related businesses such as manufacturers, distributors, shippers, and retailers of hemp-derived products, and the products themselves, may be subject to other state and federal laws related to sales, distribution, and medication among others. For example, nothing in the 2018 Farm Bill affected the authority of the

of the Secretary of Health and Human Services or the Commissioner of Food and Drugs to promulgate Federal regulations and guidelines that relate to hemp and foods, medication and public health.

 Considerations for Credit Unions Serving Hemp-Related Businesses

NCUA notes that credit unions choosing to serve the hemp industry should be aware of relevant Federal, State and Indian Tribe laws and regulations that apply to any hemp-related businesses they serve. NCUA also notes the need for any credit union seeking to serve the hemp industry to have a BSA/AML program commensurate with the complexity, and risks, of serving the industry.

NCUA highlights the need for credit unions serving the hemp industry to have the following elements of their BSA/AML programs:

• Appropriate due diligence procedures for hemp-related accounts and for compliance with SAR filing requirements. NCUA states that it is the agency’s understanding that SARs are not required to be filed for the activity of hemp-related businesses operating lawfully, provided the activity is not unusual for that business.
• If serving 2014 Farm Bill hemp-related businesses, a knowledge the states’ laws, regulations, and agreements under which each member/hemp-related business operates, an understanding of how to verify the member is part of the state’s pilot program, and the ability to adapt due diligence and reporting procedures to risks specific to participants in the pilot program(s).
• A familiarity with any other state, federal or Tribal laws and regulations that prohibit, restrict, or otherwise govern these businesses and their activity when deciding whether to serve hemp-related businesses that may already be able to operate lawfully without reliance on forthcoming 2018 Farm Bill rules,

Lending to Hemp-Related Businesses

NCUA states that lending to a lawfully operating hemp-related business is permissible, however must be done in accordance with NCUA rules such Part 723 regulating commercial lending as well as within safe and sound parameters for underwriting and appropriate commercial lending practices.

 

NCUA Risk Alert: 19-Risk-01 Business Email Compromise Fraud

August 2019

 NCUA issued the first Risk Alert of 2019 to remind credit unions of the risks related to Business Email Compromise (BEC) fraud and steps that institutions should consider in order to mitigate the risk of falling prey to such scams.

 

BEC occurs when a criminal uses email to impersonate a legitimate business or person in order to request or access fraudulent payments. Criminals may compromise a victim’s email address or domain through social engineering or use publicly available services to spoof this information.

 

NCUA notes in its Risk Alert that the FBI has created a recovery asset team with a goal to quickly identify and freeze suspicious wire transfers before funds are transferred or removed from a suspect’s account.

 

NCUA provided the following recommendation for steps credit unions can take to mitigate the risk of BEC fraud:

 

• Never make a payment change without verifying the change with the intended recipient
• Verify the accuracy of email addresses when checking mail on a mobile device
• Use a two-step verification process to verify wire requests with members, and use information from previously known email addresses and phone numbers rather than what is provided in the wire transfer request
• Require staff to investigate and verify changes to members’ personal information or business practices of the credit union’s vendors or member business accounts
• Know the routines of members’ wire activity and contact them with any changes or concerns before sending a wire transfer
• Verify transaction details with the recipient bank before sending a suspicious wire transfer
• Use email spam filters to quickly identify potential fraudulent or spoofed emails
• Create rules in the credit union’s intrusion detection system to flag emails with extensions that are similar, but different to, your credit union or members
• Use caution posting information on social media and company websites, especially job duties/descriptions, hierarchal information, and out-of-office details
• Implement multi-factor authentication (MFA) for corporate e-mail accounts that requires at least two pieces of information to login (something a user knows, such as a password, and something a user has, such as a dynamic PIN)

 

Additional self-protection strategies may be found in the Justice Department’s publication “Best Practices for Victim Response and Reporting of Cyber Incidents.”

 NCUA recommends credit unions also consider:

• contact the originating financial institution as soon as possible to request a recall or reversal, as well as a Hold Harmless Letter or Letter of Indemnity
• determine whether a Suspicious Activity Report should be filed with FinCEN (FinCEN has issued an advisory on BEC fraud schemes)

NCUA last issued a Risk Alert in February of 2013 regarding denial of service attacks.

 

Proposed Rule Summary

Accuracy of Advertising & Notice of Insured Status

Prepared by NASCUS Legislative & Regulatory Affairs Department
October 2017

 

NCUA is proposing changes to its Advertising rule, Part 740. This rule applies to federally insured state credit unions (FISCUs) by reference in Part 741.211. NCUA is proposing the addition of a 4th short statement “Insured by NCUA” as well as proposing the expansion of the exemption from the advertising statement requirement regarding radio and television advertisements. NCUA is also proposing the elimination of the requirement to include the official advertising statement on statements of condition required to be published by law.

NCUA also seeks comments on whether Part 740 should be modified to accommodate new trends in advertising such as social media, texting, and mobile banking applications.

NCUA’s proposed rule may be read here. The proposed rule is open for comment until December 4, 2017.

Summary
NCUA’s advertising rule requires each federally insured credit union (FICU) to display NCUA’s official sign.

The rule also provides FICUs three options
when advertising:

• FICUs may include the statement ‘‘This credit union is federally insured by the National Credit Union Administration.’’
• FICUs may also use the shorter version ‘‘Federally insured by the NCUA.’’
• As a third option, the official sign may be displayed in advertisements in lieu of the advertising statement.

Part 740.5(c) exempts several kinds of advertisements from the requirement to use of the above 3 advertising statements:

• Radio advertisements that are less than 15 seconds in duration
• television advertisements that are less than 15 seconds in duration

NCUA notes that these exemptions are less robust than FDIC’s for banks, which exempt bank radio and television ads of 30 seconds or less. NCUA also currently requires the official advertising statement on statements of condition required to be published by law. FDIC does not.

NCUA now proposes:

• creating a 4th short statement for the official advertising statement, “Insured by NCUA”
• Extending the exemption from the official statement to radio or TV advertisements of 30 seconds or less
• Eliminating the requirement that the official advertising statement be included in required reports of condition

NCUA also seeks comments on whether its advertising rules should be modified to facilitate the trend in advertising via new types of social media, mobile banking, text messaging and other digital communication platforms, including Twitter and Instagram.

NASCUS note:

NCUA addressed “risks” with social media in a joint guidance with other federal bank regulators released in 2013.

NCUA Board Action

Closing the TCCUSF & Setting the Normal Operating Level

Prepared by NASCUS Legislative & Regulatory Affairs Department
October 2017

The NCUA Board has voted to close the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) in 2017, ahead of its scheduled closing date of June 2021. In conjunction with the closure of the TCCUSF, and the merging of the assets and liabilities of the TCCUSF with the National Credit Union Share Insurance Fund (NCUSIF), the NCUA Board has also voted to raise the normal operating level (NOL) of the NCUSIF to 1.39%. NCUA also established a new process for establishing the NOL in the future, including a notice and comment for changes of 1 basis point or greater.

This action begins the process by which credit unions can begin receiving distribution of the excess monies currently accumulated by the TCCUSF.

NOTE: NCUA did not resolve the methodology by which it would distribute the excess funds to credit unions. Until this issue is resolved, it is unknown how much money each individual credit union will receive.

The notice of the NCUA Board action may be read here.

NCUA received 663 comments on the request for comments.

Summary

When creating the TCCUSF, Congress specified that it would terminate 90 days after the seven-year anniversary of its first borrowing from the U.S. Treasury.  The first borrowing occurred on June 25, 2009, therefore the original closing date of the TCCUSF was September 27, 2016. However, in 2010 NCUA and the Treasury agreed to extend the closing date to June 2021.

NCUA notes that currently, the NCUSIF has a balance of $13.2 billion, which exceeds both the corporate credit union Legacy Asset balance and NGN balance. As of June, 2017, the TCCUSF has a positive net position of $2 billion. That combination of financials increased NCUA’s comfort level with merging the two funds.

The current NOL for the NCUSIF was 1.3% prior to this NCUA Board action. However, in conjunction with merging the TCCUSF and NCUSIF, NCUA determined that it would raise the NOL of the NCUSIF to 1.39%.  NCUA justifies this increase by noting it modelled various economic downturns to estimate the range of potential NCUSIF exposures and concluded that to withstand a moderate recession without the equity ratio falling below the statutory minimum of 1.2% the NCUSIF’s equity ratio needs to be high enough to withstand the following:

• A 13-basis-point decline in the equity ratio due to the impact on the three primary drivers of the Insurance Fund’s performance.
• A 4-basis-point decline in the value of the Insurance Fund’s claim on the corporate credit union asset management estates.
• A 2-basis-point decline in the equity ratio expected to occur prior to when the remaining NGNs begin to mature in 2020 and remaining exposure to the Legacy Assets can begin to be reduced.

Future Review of the NOL (NCUSIF Equity Ratio)

NCUA is adopting the following policy to set the Normal Operating Level of the NCUSIF in the future. Periodically, NCUA will review the equity needs of the NCUSIF and provide an analysis to stakeholders. If NCUA determines a need to change the NOL by more than 1 basis point, it shall publish a request for comments.

NCUA’s goals in setting the NCUSIF Operating Level shall be:

• Retain public confidence in federal share insurance
• Prevent impairment of the 1% contributed capital deposit
• Ensure the NCUSIF can withstand a moderate recession without the equity ratio declining below 1.2% over a five-year period.

Miscellaneous Facts

NCUA’s notice of the Board’s decision to close the TCCUSF in 2017 contained some interesting miscellaneous facts contained in the discussion of the comments received.

• Since 2009, there have been 21 new federally insured credit unions (either new charters or privately insured credit unions that converted to NCUSIF)
• 17 of those 21 credit union filed call reports in the 2nd quarter of 2017
• In 2011, 2012, and 2013 the NCUSIF made distributions to the TCCUSF of $278.6 million, $88.1million, and $95.3million, respectively.
• The TCCUSF has collected $3 billion from legal recoveries and asset sales
• The Wescorp estate is unlikely to ever be able to repay the TCCUSF or the NCUSIF
• During the recession, the NCUSIF charged 2 premiums, 10.3 basis points in 2009 and 12.4 basis points in 2010, together totaling $1.7 billion

Final Rule Summary

Supervisory Review Committee

Prepared by NASCUS Legislative & Regulatory Affairs Department
November 2017

NCUA has finalized new regulations governing procedures for appealing material supervisory determinations to the NCUA’s Supervisory Review Committee (SRC). The new rule, Part 746 Subpart A, applies to federally insured state chartered credit unions (FISCUs) although there is no cross reference in Part 741.

NCUA’s new rules for the SRC review create a rotating pool of SRC members, formalizes the hearing process, provides for an interim review before an SRC appeal, and allows for appeal of the SRC decision to the NCUA Board.

When the rule becomes effective in January, 2018, NCUA’s current SRC governing document, Interpretive Ruling and Policy Statement 12-1 will be withdrawn.

The Supervisory Review Committee final rule may be read here. The rule becomes effective January 1, 2018.

Summary

NCUA and the federal banking agencies were directed by the Riegle Community Development and Regulatory Improvement Act of 1994 to establish appeals procedures for the review of ‘‘material supervisory determinations’’ made by the agencies. In 1995 NCUA issued its first Interpretive Ruling and Policy Statement (IRPS) setting out its appeals procedures for the review of material supervisory determinations. Prior to the publication of this current final rule, the latest iteration of NCUA’s SRC process was governed by IRPS 11-1 and IRPS 12-1.

The new final rule and SRC process has expanded the number of material supervisory determinations made by NCUA that are appealable to the SRC and provided FICUs with an opportunity to seek review by the Director of E&I. To accommodate the increased workload of the SRC, NCUA has increased the size of the SRC to include a rotating pool of at least eight NCUA senior staff.

Under the new SRC rules, a federally insure credit union (FICU) may appeal a material supervisory determinations made by NCUA staff to the SRC, and then possibly to the NCUA Board. “Material supervisory determination’’ means a written decision by a NCUA program office that may significantly affect the capital, earnings, operating flexibility, or that may otherwise affect the nature or level of supervisory oversight of an insured credit union. This includes:

• A composite examination rating of 3, 4, or 5
• A determination relating to the adequacy of loan loss reserve provisions
• The classification of loans and other assets
• A determination regarding a FICU’s consumer protection compliance
• A determination on a waiver request or an application for additional authority

A FICU may not use the SRC process to appeal:

• Determinations for which an independent right to appeal exists such as a decision to appoint a conservator or liquidating agent; or
• A decision to take prompt corrective action pursuant to section 216 of the FCUA
• Enforcement actions and decisions
• A composite examination rating of 1 or 2
• A component rating unless the component rating has a significant adverse effect on the nature or level of supervisory oversight of a FICU
• The scope and timing of supervisory contacts
• Preliminary exam conclusions communicated to the FICU before the final exam is issued
• Formal and informal rulemakings pursuant to the APA

Standard of Review, Discovery, and Dismissal

At each phase of review, each reviewing authority shall make an independent decision regarding whether the material supervisory determination that is being appealed was appropriate. The reviewing authority shall give no deference to the legal or factual conclusions of the program office or a subordinate reviewing authority. However, throughout the process, the burden of proof lies with the FICU.  A decision by the reviewing authority shall be based exclusively on the administrative record consisting of all written submissions by a FICU and a program office, decisions by subordinate reviewing authorities, and transcripts of the oral hearing before the SRC (if oral hearing held).

No part of the rule is intended to create any right to discovery or similar process.

An appeal may be dismissed by written notice if:

• it is not timely filed
• the basis for the appeal is not discernable
• the FICU asks to withdraw the request in writing
• the FICU fails to provide additional information as requested pursuant to the rule
• the FICU engages in bad faith
• the FICU fails to state a material supervisory determination to be appealed

Supervisory and Enforcement Actions

Nothing in the SRC rules is intended to affect, delay, or impede any formal or informal supervisory or enforcement action in progress or affect NCUA’s authority to take any supervisory or enforcement action against an insured credit union.

State Supervisory Authority (SSA)

For appeals where consultation with the appropriate SSA is required, the administrative record shall also consist of any written submissions by the SSA.

Filing an Appeal to the SRC

Before filing an appeal to the SRC, or requesting review by the director of E&I, a FICU must make a written request for reconsideration from the appropriate program office that issued/made the material determination to which the FICU objects. The written request must be made within 30 calendar days after receiving an examination report containing the subject to be appealed and must include:

• A statement of the facts on which the request for reconsideration is based
• A statement of the basis for the material supervisory determination to which the FICU objects and the alleged error in such determination
• Any other evidence relied upon by the FICU that was not previously provided to the appropriate program office making the material supervisory determination

The NCUA program office has 30 calendar days after receiving the FICU request for reconsideration to issue a written decision, stating the reasons for the decision, and providing notice of the FICU’s right to file a request for review by the Director of E&I or file an appeal with the SRC. If a written decision is not issued within 30 calendar days, the request for reconsideration will be deemed to have been denied.

• Review by Director of E&I – After receiving the written decision from the Program Office Prior, a FICU has the option to request the Director of E&I to review the matter before the FICU files an official appeal to the SRC. The FICU has 30 calendar days to make this request (in writing). In addition to containing the basis for the request for review, the written request must contain a certification that the FICU’s board of directors authorized the request for review to be filed.

In reviewing the matter, the Director of E&I has 15 days from receipt of the request to ask for additional information from the appropriate program office or the FICU. Any party asked for additional information has 15 days to respond. The Director of E&I generally has 30 days to render a decision (the deadline is extended if additional information is sought).

If the Director of E&I finds against the FICU, or if the FICU had decided to skip the E&I review, the FICU may file an appeal to the SRC. The FICU has 30 days from the triggering event (rejected reconsideration or rejected/negative E&I review) to file the written request of appeal to the SRC. The request is filed with the Secretary of the NCUA Board and must include:

• A statement that the FICU is filing an appeal with the SRC
• A statement of the facts on which the appeal is based
• A statement of the basis for the determination to which the FICU objects and the alleged error in such determination
• Any other evidence relied upon by the FICU that was not previously provided to the appropriate program office or, if applicable, the Director of the Office of Examination and Insurance
• A certification that the FICU’s board has authorized the appeal to be filed

The SRC Hearing of an Appeal

An appeal to the SRC will be governed by the following procedures:

• The SRC may request additional information from either of the parties within 15 calendar days after the filing of an appeal (and parties have 15 days to submit the materials)
• Unless the FICU requests an all written hearing, the SRC will hear oral presentations from the parties at NCUA headquarters. During an oral hearing, the FICU presents first and each side will be given equal amount of time (some of which may be reserved for rebuttal).
• The FICU may choose any 2 individuals to represent it at the oral presentation to the SRC
• The SRC will issue decisions in writing within 30 calendar days after the oral presentation of the appeal or 30 calendar days from receipt of the request of appeal if the FICU chose to have the appeal decided solely on the written record
• The SRC shall publish its decisions on NCUA’s Web site with appropriate redactions to protect confidential or exempt information. Previously published decisions may be cited as precedent in future appeals.
• If need be, the SRC may consult with E&I or the Office of General Counsel if the matter on appeal involves legal or policy interpretations

Composition of Supervisory Review Committee

The NCUA Chairman will select at least eight NCUA senior staff to comprise the SRC pool, not to include Regional Directors, Associate Regional Directors, the Executive Director, the Deputy Executive Director, the General Counsel, the Director of the Office of Examination and Insurance, or a senior policy advisor or chief of staff to a Board Member. From this pool, three members will be chosen to hear any given appeal. A Special Counsel named by the NCUA General Counsel shall serve as a permanent nonvoting member of the SRC to advise the SRC on procedural and legal matters.

Appeal to the NCUA Board

If the SRC finds against the FICU, the FICU may request an appeal to the NCUA Board. The FICU has 30 days to request an appeal to the NCUA Board. At least 1 NCUA Board member must agree to hear the appeal in order for the Board to accept the appeal.

A FICU’s written request for an appeal to the NCUA Board must include:

• A statement of the facts on which the appeal is based
• A statement of the determination to which the FICU objects and the alleged error in such determination
• A certification that the FICU’s board of directors has authorized the appeal

When submitting its written request for an appeal of an SRC determination to the NCUA Board, the FICU may also request an oral hearing before the Board. The request for an oral hearing must should good cause for an oral hearing and state why the appeal may not be presented adequately in writing. If the request is granted, the hearing will take place at NCUA.

After considering the record, the oral presentations (if requested and granted) and any other information requested to be submitted to the NCUA Board, the NCUA Board will issue a decision within 90 days. Decisions on appeals will be published on the NCUA website pursuant to the same protocols as discussed above for publication of SRC decisions.

State Regulators

The NCUA SRC appeal process applies only to NCUA material supervisory determinations. It does not include determinations/actions of state regulatory agencies. If a supervisory determination that is subject to a request for review or appeal pursuant to these procedures is the product of a joint NCUA/state determination, NCUA will immediately notify the state regulator (providing copies of all relevant materials and the request for review) and solicit the state regulator’s views regarding the merits of the appeal.

Any NCUA determination on review/appeal affects only the NCUA’s actions. NCUA will notify the state regulator of its decision with respect to NCUA’s involvement in the determination and leave the FICU and state to resolve issues between them.

Summary: NCUA Final Rule, Corporate Credit Unions

Prepared by the NASCUS Legislative and Regulatory Affairs Department
November 2017

NCUA has amended provisions in its Corporate Credit Union rule, Part 704, related to retained earnings and Tier I capital. The changes, supported by NASCUS, include:

• amending the definition of ‘‘retained earnings’’ to incorporate ‘‘GAAP equity acquired in a merger’’
• allowing the inclusion of all PCC in capital calculations upon a corporates reaching 250 basis points of retained earnings
• adding a retained earnings threshold to the expanded authorities provisions

The Corporate Credit Union final rule may be read here. The rule becomes effective December 22, 2017.

Summary

In response to the corporate crisis during the recession, NCUA took steps to curtail corporate credit union activities to reduce risk to the natural person credit union system. Among the rule changes implemented in 2010, NCUA set investment concentration limits, limited asset maturities, and prohibited investments in subordinated and private label mortgage-backed securities. The 2010 rule also implemented a prompt corrective action (PCA) regime stipulating capital adequacy for corporates.

NCUA has now amended the corporate credit union rule again to provide corporate credit unions more flexibility in calculating Tier 1 capital. The final rule:

• Incorporates ‘‘GAAP equity acquired in a merger’’ as a component of retained earnings;
• Permits corporates to include all PCC  sourced from an entity not federally insured in its Tier 1 capital once a corporate achieves a retained earnings ratio of 250 basis points
• Adds a definition of “retained earnings ratio” to mean ‘‘the corporate credit union’s retained earnings divided by its moving daily average of net assets;’’

The NCUA did tighten the expanded authorities section of Appendix B of the corporate rule by adding a retained earnings ratio requirement in addition to the existing leverage ratios.

Summary: Part 746 — Appeals

Prepared by the NASCUS Legislative and Regulatory Affairs Department
November 2017

NCUA has promulgated a new final rule to establish procedures to govern appeals to the NCUA Board. The rule establishes a uniform procedure that will apply to agency regulations that currently have their own embedded appeals provisions.

The Appeals final rule may be read here. The rule became effective January 1, 2018.

Summary

Part 746 subpart B Appeals process applies to the following NCUA rules:

• § 701.14 Change in official or senior executive officer in credit unions that are newly chartered or are in troubled condition
• § 701.21 Loans to members and lines of credit to members
• § 701.22 Loan participations
• § 701.23 Purchase, sale, and pledge of eligible obligations
• § 701.32 Payment on shares by public units and nonmembers
• § 701.34 Designation of low income status; Acceptance of secondary capital accounts by low-income designated credit unions
• Chartering applications
• Merger, FOM expansion and spinoff requests
• Underserved area request
• Requests to convert to state or federal charter
• Requests for expanded investment authority (FCUs)
• § 705 requests for loans or technical assistance grants
• § 709 certain claims in liquidation
• § 741 – NCUA revocation of approval of foreign branch
• §750.6 Golden parachutes

Part 746 Subpart B, Appeals Procedure

Upon receiving an adverse determination on a qualifying issue from NCUA, the credit union or credit union professional has 30 days to request a reconsideration from the issuing NCUA program office. The request for reconsideration, which must be in writing, should contain:

• A statement of the facts on which the request for reconsideration is based
• A statement of the basis for the initial agency determination to which the petitioner objects and the alleged error in such determination
• Any other support or evidence relied upon by the petitioner which was not previously provided to the appropriate program office.

The program office will review its decision, taking into consideration the existing facts and any new information provided in the written request for reconsideration. The program office has 30 days to render a decision. The decision will be in writing and will state the reasons for the decision. The burden of “proof” for reconsideration lies with the credit union/petitioner seeking the review by the program office.

If the program stands by the initial decision, or if the credit union/petitioner demurs on seeking the program office reconsideration, then the credit union petitioner may seek an appeal to the NCUA Board. The written appeal to the NCUA Board

Any appeal filed with the Board must include:

• A statement of the underlying facts of the appeal
• Copies of all pertinent documents, records, and materials that support the appeal
• Petitioner statement outlining why the petitioner objects to the initial agency determination and identifying any alleged errors made by the program office
• Any other materials or evidence relied upon by the petitioner that were not provided to the appropriate program office

The burden of proof in an appeal to the NCUA Board rests with the petitioner. A petitioner has 45 days from submission of an appeal to submit amendments to the appeal or additional information.

At the time petitioner requests an appeal, the petitioner may request an oral hearing before the NCUA Board. Should petitioner seek an oral hearing, that request must be submitted in writing at the same time as request for appeal, but in a separate document. Decision to grant an oral hearing is the discretion of the Board.

Once the appeal is received by the NCUA Board, it will be reviewed by an attorney from general Counsel’s office designated as the “Special Counsel” to determine whether conformance with the rules governing appeals. The Special Counsel will also contact the Program Office to request copies of all relevant materials and conduct a review of those materials as well as the petitioner’s materials in order to make a recommendation to the NCUA Board.

The Board will render its decision within 90 days of the original receipt of the request for appeal from petitioner.

The new rule does not apply to:

• Formal enforcement actions
• Creditor claims in liquidation
• Material supervisory determinations within the jurisdiction of the SRC
• Challenges to actions imposed under PCA
• Appeals of matters that are delegated by rule to an officer/position below the Board for final, binding agency action

NCUA will consider including information on Appeals in its Annual Report. In the meantime, NCUA will continue to publish information regarding Appeals on the NCUA website.

NCUA will provide copies of all Appeal related correspondence to SSAs.

Proposed Rule Summary

Capital Planning & Stress Testing

Prepared by NASCUS Legislative & Regulatory Affairs Department
October 2017

After three years of capital planning and stress testing, NCUA is proposing changes to its rule applicable to credit unions with $10 billion or more in assets. The proposal would create three tiers for credit unions with assets of $10 billion or more with credit union in the first tier being exempted from the stress testing requirement, and allowing credit union in tiers II and III to conduct their own stress tests. All credit unions with at least $10b in assets would be required to develop annual capital plans and submit those plans to NCUA.  In addition, Tiers II and III would be required to include stress testing scenarios in their capital plans and Tier III credit unions would need formal NCUA approval of the annual capital plan.

Since promulgation of the original stress testing rule proposal in 2013, NASCUS has advocated allowing credit unions to conduct their own stress tests.

The proposed rule is here; comments are due December 29, 2017.

Summary

Under the proposal, NCUA would create 3 Tiers for credit unions with $10 billion or more in assets. Each tier would have differing obligations under the Capital Planning and Supervisory Stress Testing Rule, Part 702 Subpart E. NCUA reserves the right to classify an otherwise Tier I or Tier II credit union into a higher Tier based upon that credit union’s risk profile.

While all credit unions with assets greater than $10 billion would continue to be required to have capital policies and submit capital plans to NCUA, Tier I & II credit unions would not have to obtain formal NCUA approval of submitted capital plans. In addition, only Tier II and II credit unions would have to perform annual stress testing.

Tier I credit unions

Tier I credit unions would be those credit unions with between $10 billion and $20 billion in assets that have completed less than three capital planning cycles. These credit unions would not be required to complete, or be subject to, a supervisory stress test. Tier I credit unions would be required to conduct Capital Planning, and those capital plans would continue to be submitted to NCUA annually on May 31. However, NCUA would no longer be specifically approving the submitted capital plans, but rather review the capital planning as part of its normal supervisory process.

 

Tier II credit unions

Tier II credit unions would be those credit unions with less than $20 billion in assets that haves completed three or more capital planning cycles. Like a Tier I credit union, a Tier II credit union’s capital policy and capital plan would be reviewed during the course of normal ongoing supervision.  Tier II credit unions must incorporate NCUA’s annual stress testing scenario into its capital plan. Tier II credit unions would also be required to conduct annual stress tests, but would not be subject to the existing 5% minimum stress test capital threshold.

Tier III credit unions

Tier III credit unions have $20 billion or more in total assets. Tier III credit unions will continue to submit their annual capital plans to NCUA for approval, must include the stress test scenario into the capital plan, must conduct annual stress tests, and will continue to be subject to the current 5% minimum stress test capital threshold. NCUA’s formal rejection of a Tier III credit union’s capital plan would be subject to the Supervisory Review Committee process (Part 746 Subpart A).

A Tier III credit union’s assets are measure on a March 31 threshold. Any credit union with $20 billion or more in assets would be subject to the Tier III requirements for thee Capital Planning cycle that begins on June 1 of that year.

Tier	Tier I	Tier II	Tier III
Definition	Credit unions with at least $10b in assets but less than $20b that have note completed 3 capital planning cycles.	Credit unions with assets between $10b and $20b that have completed 3 cycles of capital planning.	Credit unions with more than $20 billion in assets.
Requirements	Must engage in capital planning and submit annual plan to NCUA Formal NCUA approval of capital plan not required	Must submit capital plan to NCUA annually Must conduct annual stress testing Formal NCUA approval of capital plan not required Annual stress testing scenario must be incorporated into capital plan	Annual submission of capital plan for NCUA approval Inclusion of stress test scenario in capital plan Annual stress test required Must maintain 5% stress test capital ratio

Stress Testing

Under the current rule, NCUA has conducted annual stress tests on all credit union with $10 billion or more in assets. The current rule also contains a provision that allowed covered credit unions to apply to NCUA, after NCUA had conducted 3 stress tests on the credit union, to conduct its own annual stress test (Part 702.506(c)). Under the proposal, credit unions required to undergo annual stress testing (Tier II and II) would conduct their own stress tests. In addition, Tier II and Tier III credit unions would be required to incorporate NCUA’s annual stress test scenarios into its annual capital plan submitted to NCUA.

Furthermore, Tier III credit unions would continue to be required to submit a capital restoration plan or risk mitigation plan if the stress test results in a capital level below 5%.

• Web Site Instructions

 

NCUA will publish instructions on its website governing the stress tests conducted by Tier II and III credit unions. NCUA would publish different instructions for the two Tiers subject to stress testing requirements.

Consultation with State Regulators

The proposed rule retains the provision that NCUA consult with state regulators before taking supervisory actions under this provision. NASCUS had successfully advocated for this provision in 2013.

Technical and Conforming Proposed Changes

NCUA proposes making several changes the agency considers technical. Under Part 702.502, which contains definitions related to the capital planning and stress testing rule, NCUA would make the following changes:

• NCUA is deleting the terminology related to “adverse scenarios” and replacing them with references to “scenarios” and “stressed scenarios”
• Would define the capital planning cycle to be from June 1 to the following May 31

NCUA seeks additional comments on whether the asset thresholds for the 3 Tier are appropriately rightsized.

While NCUA notes that it will publish stress testing instructions on the web, the proposal is silent as to whether those instructions will be vetted by notice and comment before being finalized.