Final Rule: Beneficial Ownership Information Reporting Requirements

Final Rule Summary
FinCEN: Beneficial Ownership Information Reporting Requirements

NASCUS Legislative and Regulatory Affairs Department
October 31, 2022

On September 30, 2022, the Financial Crimes Enforcement Network (FinCEN), issued a final rule, Beneficial Ownership Information Reporting Requirements, implementing the reporting requirements of Section 6403 of the Corporate Transparency Act (CTA)[1]. In conjunction with the final rule, FinCEN also issued a summary Fact Sheet found here.  The final rule requires certain entities to file with FinCEN reports that identify two categories of individuals: the beneficial owners of the entity, and individuals who have filed an application with specified governmental authorities to create the entity or register it to conduct business. This information will be housed within the forthcoming Beneficial Ownership Secure System (“BOSS”), a database currently under development by FinCEN.

The final rule and associated requirements are intended to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity while minimizing the burden on the entities doing business in the United States.

Summary

The Corporate Transparency Act (CTA) was enacted as part of the Anti-Money Laundering Act (AMLA) of 2020 and is intended to expand and modernize the U.S. government’s ability to collect beneficial ownership information in order to deter money laundering, corruption, tax evasion, fraud, and other financial crime.  The CTA requires FinCEN to:

  1. Implement rules for the reporting of beneficial ownership information (BOI) of legal entities organized or registered to conduct business in the U.S.
  2. Develop protocols for access to, and the sharing of reported BOI
  3. Amend the current Customer Due Diligence (CDD) Rule applicable to financial institutions to account for the new requirements of the CTA

This final rule applies only to beneficial ownership. FinCEN must still issue two additional proposed rulemakings under the CTA addressing items 2 and 3 above related to access and CDD.

The final rule is effective January 1, 2024. Companies required to report that are created or registered prior to the effective date will have a one-year grace period (January 1, 2025) to file their initial BOI reports. Reporting companies created or registered on or after the effective date will have 30 days to file their initial reports with FinCEN. Exempt entities that no longer qualify for exemption under the regulation will be required to file a report within 30 calendar days of the date it no longer meets the exemption criteria.

What is a Reporting Company?

Reporting Companies are both domestic and foreign. The final rule defines each type as follows:

  • Domestic Reporting Companies: Any corporation, limited liability company, or other entity that is created by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe[2]; and
  • Foreign Reporting Companies: Any corporation, limited liability company, or other entity, that is formed under the law of a foreign country; and registered to do business in any State or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.

The CTA sets forth from the definition of “reporting company” twenty-three[3] specific types of exempt entities. Consistent with the proposed rule, categories of exempted entities include:

  • SEC reporting issuers
  • Banks and credit unions
  • Tax-exempt entities
  • MSBs registered with FinCEN
  • Broker-dealers
  • S. government authorities

Also exempt from the final rule are:

  • Large operating companies: employ more than 20 full-time employees in the U.S. and have an operating presence at a physical office within the U.S. and filed a federal income tax or information return in the U.S. for the previous year demonstrating more than $5,000,000 in gross receipts or sales.
  • Inactive entities: in existence on or before January 1, 2020, and meet other requirements[4]
  • Pooled investment vehicles: operated or advised by a qualifying bank, credit union, broker-dealer, investment company, investment adviser, or venture capital fund adviser[5]
  • Subsidiaries: whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more exempt entities subject to exception.
  • Investment companies and investment advisers: registered with the SEC
  • Venture capital fund advisers: that have filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV, or any successor thereto, with the SEC.

What information must be reported?

As previously discussed, domestic or foreign entities registered after January 1, 2024, must file an initial report with FinCEN within 30 days after formation or registration while reporting companies registered prior to the January 1, 2024, effective date will have a one-year grace period.

Reporting Companies

The initial report must include the following about the reporting company in order to comply with the rule:

  • Full name and address;
  • Trade or fictitious names used;
  • Address of the principal place of business
  • Jurisdiction of formation or, in the case of a foreign company, jurisdiction in which first registered; and
  • Taxpayer Identification Number (TIN), or where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction.[6]
  • Beneficial Owners and Company Applicants

The initial report must also include the following information about each beneficial owner and company applicant:

  • Full legal name;
  • Date of birth;
  • Current address;
  • A unique identifying number from a non-expired passport, driver’s license, government-issued ID, or identification document issued by a State or local government or tribe; and
  • An image of the document showing the unique identifying number.

A FinCEN unique identifier may also be obtained. A FinCEN identifier issued by FinCEN to individuals and reporting companies and an individual may apply for a unique identifier if the individual submits to FinCEN the same four pieces of identifying information as required for the BIO report.

It is noted that obtaining a unique identifier may reduce the burden on reporting companies on keeping BOI up to date as well as mitigate privacy concerns inherent with document retention.

Beneficial Owners

Similar to the current CDD rule, the BOI final rule requires the reporting of beneficial ownership concerning (1) beneficial owners; and (2) company applicants of the reporting company

  • The term “beneficial owner” is defined in terms of both ownership and control, similar to that of the current CDD rule.
  • “Ownership” is defined as any individual who, directly or indirectly, exercises substantial control over a reporting company or who owns or controls at least 25% of the ownership interests of a reporting company.

Substantial Control

The final rule establishes three specific, yet broad, indicators of substantial control. “Substantial Control” includes:

  • Serves as a senior officer of a reporting company (not including those who serve as a corporate secretary or treasurer);
  • Has authority over the appointment or removal of any senior officer or a majority of the board of directors;
  • Directs, determines, or has substantial influence over important influence over important decisions made by a reporting company[7] or;

The final rule also indicates that an individual may directly, or indirectly, including as a trustee of a trust or similar arrangement, exercise substantial control over a reporting company through:

  • Board representation;
  • Ownership or control of a majority of the voting power or voting rights of a reporting company;
  • Rights associated with any financing arrangement or interest in a company;
  • Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company
  • Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or
  • Any other contract, arrangement, understanding, relationship, or otherwise.

Company Applicants

In addition to beneficial owners, the reporting company must also report the “company’s applicant.” A “company applicant” is defined as the individual who directly files the document to create or register the reporting company and the individual who is primarily responsible for directing or controlling such filling if more than one individual is involved in the filing.

This requirement is only applicable to reporting companies created or registered on or after the January 1, 2024, effective date.

Certification

Under the final rule, each reporting company is required to certify that its report or application is true, correct, and complete. The final rule also clarifies that the certification requirement applies to any report or application submitted to FinCEN pursuant to 31 CFR 1010.380(b), such as an application for a FinCEN ID, not just to a BOI report submitted by a reporting company.[8]  Under the final rule, each reporting company will certify that its report or application is true, correct, and complete. FinCEN recognized in the final rule that much of the information required to be reported about beneficial owners and applicants will be provided to reporting companies by those other individuals. However, the structure of the CTA deliberately places the responsibility for reporting this information on the reporting company itself.

While an individual may file a report on behalf of a reporting company, the reporting company is ultimately responsible for the filing. The same is true of the certification. Under the final rule, the reporting company is required to make the certification and any individual who files the report as an agent of the reporting company will certify on the reporting company’s behalf.

Timing Requirements

As previously discussed, the final rule imposes specific timing requirements for the filing of BOI reports as well as updates and corrections to information submitted. Newly created entities (domestic and foreign reporting companies) must file the initial BOI reports within 30 days after formation or registration. Existing reporting companies have until January 1, 2025, to file with FinCEN.

Reporting companies must also update information in a timely manner as well as correct any inaccurate information filed in the BOSS. The final rule requires an updated report to be filed within 30 days after any change in the information reported to FinCEN. This includes any change in beneficial ownership information as well as any change in previously reported beneficial ownership or company applicant. Additionally, the final rule requires a corrected report must be filed within 30 days after the reporting company becomes aware of any inaccuracies.

[1] See NDAA for Fiscal Year 2021, H.R. 6395, 116th Congress (2020) Sec. 6401-6403.

[2] FinCEN believes this definition will exclude many sole proprietorships, trusts, and general partnerships, subject to applicable State or tribal law.

[3] See 31 U.S.C. 5336(a)(11)(B)(i)–(xxiii)

[4] FR, Vol. 87, No.189, p. 59545

[5] FinCEN further notes that the term “pooled investment vehicle” encompasses a wide variety of investment products with a wide range of names and structures, which present a range of risk profiles. It is accordingly impracticable for FinCEN to prospectively opine on the applicability of the exemption to specific structures that may not carry the name “pooled investment vehicle.” However, as a general principle, FinCEN notes that a vehicle’s eligibility for this exemption does not hinge on its nominal designation, but rather on whether the vehicle or entity satisfies the elements articulated in the final regulatory text.

[6] The proposed rule did not require that reporting companies provide the TIN

[7] Including decisions regarding: (1) The nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;

(2) The reorganization, dissolution, or merger of the reporting company;

(3) Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company;

(4) The selection or termination of business lines or ventures, or geographic focus, of the reporting company;

(5) Compensation schemes and incentive programs for senior officers;

(6) The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts;

(7) Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures;

 

[8] 31 CFR 1010.380(b)

Rule Summary: FRB 12 CFR Part 235; Regulation II; Debit Card
Interchange Fees and Routing

NASCUS Legislative and Regulatory Affairs Department
November 1, 2022

The Board of Governors adopted a final rule amending Regulation II Debit Card Interchange Fees and Routing [1] on October 11, 2022. The final rule specifies the requirement that each debit card transaction must be able to be processed on at least two unaffiliated payment card networks applies to card-not-present transactions, clarifies the requirement that debit card issuers ensure that at least two unaffiliated networks have been enabled to process debit card transactions, and standardizes and clarifies the use of certain terminology.

Amendments to Regulation II become effective July 1, 2023.[2]

Background

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was enacted on July 21, 2010[3], amending the Electronic Fund Transfer Act (EFTA) (15 U.S.C. 1693 et seq.) to add a new section 920.  EFTA Section 920 directed the board to prescribe regulations that limit restrictions issuers and payment card networks (networks) may place on the processing of debit card transactions. These requirements included prohibiting exclusivity arrangements with networks for debit card transaction processing and prohibiting issuers or networks from restricting the ability of a merchant to choose among networks enabled to process debit card transactions

As a result of these changes the Board of Governors promulgated Regulation II in July 2011[4], including Sections 235.7(a) and (b).

On May 13, 2021, the Board proposed to amend Regulation II’s prohibition on network exclusivity to clarify that debit card issuers should enable at least two unaffiliated networks for card-not-present debit card transactions.[5]

The Board received slightly more than 2,750 comment letters in response to the proposal including 1,700 from debit card issuers (all depositories or related trade associations, approximately 1,000 from merchants and related trades organizations, five network providers, three federal agencies, three government officials and approximately 40 from interested consumers or consumer groups.  Approximately 2,600 of the letters were one of 11 form letters.

Summary

The Board adopted amendments to §235.7(a)(2) and the commentary of Appendix A to §235.7(a) substantially consistent with the initial proposal but with modest changes to address issues raised by commenters.

Specifically, §235.7(a)(2) of the final rule provides that an issuer satisfies the prohibition on network exclusivity only if the issuer enables at least two unaffiliated networks to process an electronic debit transaction, where such networks satisfy two requirements:

  • The enabled networks in combination must not, by their respective rules or policies or by contract with other restrictions imposed by the issuer, result in the operation of only one network or only multiple affiliated networks for a geographic area, specific merchant, particular type of merchant, or particular type of transaction.
  • The enabled networks must have each taken steps reasonably designed to be able to process the electronic debit transactions that they would reasonably expect will be routed to them based on the expected volume.

The notice states that the Board believes §235.7(a)(2) final language clarifies the requirement to “enable” at least two unaffiliated networks.

The Board also adopted amendments to Appendix A to Part 235 Official Board Commentary on Regulation II to clarify that §235.7(a) does not require an issuer to ensure that two or more unaffiliated networks will be available to the merchant to process every electronic debit transaction.  To comply with §235.7(a) it is sufficient for an issuer to configure each of its debit cards so that each electronic debit transaction performed with such card can be processed on at least two unaffiliated networks, even if the networks that are actually available to the merchant for a particular transaction are limited by other factors, including card acceptance technologies that a merchant adopts or the networks that the merchant accepts.

Finally, the Board adopted other non-substantive changes to terminology outside the aforementioned amendments to Append A to Part 235 Official Board Commentary on Regulation II to Part 235.7(b).

[1] Federal Register announcement can be found at https://www.federalregister.gov/documents/2022/10/11/2022-21838/debit-card-interchange-fees-and-routing

[2] Section 302 of the Riegle Community Development and Regulatory Improvement Act, Pub. L. 103–325, requires that amendments to regulations prescribed by a federal banking agency that impose additional requirements on insured depository institutions must take effect on the first day of a calendar quarter that begins on or after the

date of publication in the Federal Register. 12 U.S.C. 4802. Consistent with this requirement, the effective date of the final rule is July 1, 2023.

[3] Public Law 111–203, 124 Stat. 1376 (2010)

[4] Regulation II, Debit Card Interchange Fees and Routing, codified at 12 CFR part 235. Regulation II also implements a separate provision of EFTA section 920 regarding debit card interchange fees.

[5] 86 FR 26189 (May 13, 2021). The original proposal requested public comment by July 12, 2021, but the Board later extended the comment period an additional 30 days to August 11, 2021. 86 FR 34644 (June 30, 2021).

Treasury Request for Comment Summary: Federal Insurance Response to Catastrophic Cyber Incidents

In response to a Government Accountability Office report, the Federal Insurance Office in the Department of Treasury issued a notice requesting comment from the public on whether there should be a federal insurance response related to cyber insurance and catastrophic cyber incidents.

Comments are due by November 14, 2022, and the notice can be found here.

Summary

The Government Accountability Office (GAO) issued a report in June 2022 recommending that the Federal Insurance Office (FIO) and the Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency (CISA) conduct a joint assessment to determine “the extent to which risks to critical infrastructure from catastrophic cyber incidents and potential financial exposures warrant a federal insurance response.”

The FIO is seeking public comment as to whether a federal insurance response to “catastrophic” cyber incidents may be warranted, as well as how such an insurance response should be structured and other related issues.  The FIO is also seeking comment on issued concerning the risks of catastrophic cyber incidents to critical infrastructure, the potential quantification of such risks, the extent of existing private market insurance protection for such risks, whether a federal insurance response is warranted, and how such a federal insurance response, if warranted, should be structured.

The FIO seeks feedback on a number of topics such as:

  • Catastrophic cyber incidents
    • Nature of Event
    • Measuring financial and insured losses
    • Cybersecurity Measures
  • Potential Federal Insurance Response from Catastrophic Cyber Incidents
    • Insurance Coverage Availability
    • Data and Research
    • Federal Insurance Response
    • Potential Structures for Federal Insurance Response
    • Potential Models
    • Participation
    • Scope of Coverage
    • Cybersecurity Measures
    • Moral Hazard
    • Risk Sharing
    • Reinsurance/Capital Markets
    • Funding
    • Evaluation/Data Collection
    • Limitations
  • Effects on cyber insurance market

 

Summary re: Department of Homeland Security’s Request for Information on the Cyber Incident Reporting for Critical Infrastructure Act of 2022

CISA issued a Request for Information to receive input from the public as CISA develops proposed regulations required by the Cyber Incident Reporting for Critical Infrastructure Act of 2022 (CIRCIA).

RFI comments are due by November 14, 2022, and the Federal Register notice can be found here.

Summary:

CIRCIA directs CISA to develop and oversee the implementation of regulations requiring covered entities to submit reports detailing covered cyber incidents and ransom payment CISA.  CIRCIA requires CISA to publish a Notice of Proposed Rulemaking (NPRM) within 24 months of the date of enactment of CIRCIA.

CISA is interested in receiving public input on potential aspects of the proposed regulation prior to publication of the NPRM and is issuing this RFI as a means to receive that input. CISA is seeking input on all aspects of CIRCIA’s regulatory requirements but is particularly interested in input on definitions for and interpretations of the terminology to be used in the proposed regulations; the form, manner, content, and procedures for submission of reports required under CIRCIA; information regarding other incident reporting requirements including the requirement to report a description of the vulnerabilities exploited; and other policies and procedures, such as enforcement procedures and information protection policies, that will be required for the implementation of the regulations.

The notice contains a list of topics CISA believes inputs would be particularly useful in developing a balanced approach to implementing the regulatory authorities Congress assigned to CISA under CIRCIA.

 

 

CFPB Summary: Request for Information Regarding Mortgage Refinances and Forbearances

The Consumer Financial Protection Bureau (CFPB) is seeking comment from the public about (i) ways to facilitate mortgage refinances for consumers who would benefit from refinancing, especially consumers with smaller loan balances; and (ii) ways to reduce risks for consumers who experience disruptions in their financial situation that could interfere with their ability to remain current on their mortgage payments.

Comments are due on the RFI no later than November 28, 2022. The RFI can be found here.

Summary:

The Bureau is requesting information about (i) ways to facilitate residential mortgage loan refinances for borrowers who would benefit from refinances, especially borrowers with smaller loan balances; and (ii) ways to reduce risks for borrowers who experience disruptions that could interfere with their ability to remain current on their mortgage payments.

The Bureau looks at a number of possible means to facilitate beneficial refinancing:

  • Targeted and streamlined refinance programs – programs used to refinance programs through reduced underwriting and documentation requirements, typically with lower transaction costs than traditional refinances. These programs are generally aimed at lowering interest rates and monthly payments for consumers who may otherwise be unlikely or unable to refinance.
  • New Products to Facilitate Beneficial Refinances – Some creditors have introduced mortgage products designed generally to promote beneficial refinances such as offering reduced closing costs on future refinancing with the same creditor or “auto-refi” mortgages.
  • Forbearances/Other Loss Mitigation – the Bureau discussed the benefits of forbearance/loss mitigation programs like the CARES Act and similar forbearance programs offered by private companies.

Request for Comment:

The Bureau welcomes comments from consumers, creditors, and other stakeholders including the submission of descriptive information about experiences of people participating in the mortgage market.

Barriers to Refinancing

  • What barriers may prevent consumers from accessing falling interest rates through refinancing and what solutions could lower those barriers, particularly for consumer with smaller loan balances?
  • Are there particular issued in obtaining refinances or would any particular approaches be more effective for certain types of homeowners, such as servicemembers, older adults, and first-time homeowners?
  • To what extent do large fixed costs of refinancing and limited profitability for smaller loan balances limits beneficial refinances?
  • What potential policies could lower costs for beneficial refinances?
  • How much do common risk-based underwriting factors like credit scores and loan to value ratios account for the differences in refinancing rates across the population?
  • To what extent do the types of creditors offering refinance products in particular geographic areas affect refinancing rates in some areas and for some consumers?
  • To what extent are refinancing rates affected by potential barriers that may be more difficult to quantify, including borrowers’ shopping behavior, trust of financial institutions, or the complexity and documentation involved in the refinancing process?
  • To what extent do consumers in rural areas face limited opportunities for refinances and what are the factors, including smaller loan balances, that may limit refinance opportunities for those consumers?

 

Targeted and Streamlined Refinances

 

  • How can the Bureau support industry efforts to facilitate beneficial refinances through targeted and streamlined refinance programs?
  • What are the current barriers to widespread use or promotion of existing refinance programs and, relatedly, what features of refinance programs are important to promoting widespread use?
  • What protections should be included in refinance programs to ensure consumer benefit, such as requirements for a lower interest rate and monthly payments, loan term limits, limits on serial refinancing, and requirements to refinance the consumer into a more stable mortgage product?
  • Should the Bureau’s rules, including the ART-QM rule, be amended to encourage beneficial refinances while preserving important protections for consumers? If so, how? What are the risks/benefits of doing so?
  • What are the risks and benefits of removing or modifying the current ATR-QM requirement that a creditor must consider and verify a consumer’s income or assets relied on in making the loan in the context of a refinance program?

Potential New Products to Facilitate Refinances

  • What products/programs have lenders introduced to attempt to facilitate refinances for borrowers who would benefit from refinancing? What are the advantages and disadvantages of these products and programs?
  • What are the potential benefits and drawbacks of auto-refi mortgages and one way ARMs?
  • Could creditors feasibly market and price auto-refi mortgages and one-way ARMs?
  • How could creditors most effectively structure auto-refi mortgages?
  • How could creditors most effectively structure one way ARMs?
  • How could these products be designed to minimize risks to consumers?
  • Under what market conditions should an auto-refi mortgage automatically refinance?
  • Under what market conditions should the rate of one-way ARM change?
  • Should these conditions be regulated or left to market forces?
  • Do any market factors or practical difficulties, including secondary market liquidity and mortgage-backed securities (MBS) investor interest, preclude the development of auto-refi mortgages or one-way ARMs? How would these or similar products impact the MBS market?
  • Should the Bureau amend the ATR-QM rule or other regulations to permit or encourage creditors to offer auto-refi mortgages or one-way ARMs? If so, how?
  • Are there any other new products that creditors could feasibly develop that would allow more borrowers to receive the benefits of reduced mortgage interest rates?
  • Would these products be prohibited or discouraged by existing regulations promulgated by the Bureau?
  • Should the Bureau (or other Federal regulators) amend regulations to permit or encourage the development of these products?
  • Are there other legal impediments or policies that may deter the introduction of auto-refi mortgages, one way ARMs, or other new products that could facilitate beneficial refinances?

Forbearances/Other Loss Mitigation

  • What are the benefits and drawbacks of automating and streamlining short and long-term loss mitigation offers?
  • If such automation and streamlining of loss mitigation offers is incorporated within new mortgage products:
    • How should such products be structured?
    • How and where should such features be established?
  • Under what circumstances should short or long-term loss mitigation solutions be offered automatically? For example, should forbearance be offered automatically upon the declaration of a national emergency or presidentially declared disaster, when unemployment rates in the consumer’s locality reach a certain level, when a borrower loses their job, when a co-borrower on the loan dies, or under other circumstances? What factors should be considered regarding these circumstances? Should any documentation from the consumer be required in any of these circumstances?
  • For short-term loss mitigation solutions, such as forbearance, to what extent is there tension between the goal of offering meaningful immediate payment relief and the goal of ensuring that the balance owned does not grow so large as to make long-term loss mitigation solutions difficult to achieve? Should there be a maximum solution and, if so, what is the appropriate maximum length?
  • What impact would the Bureau’s mortgage servicing regulations, such as those relating to communications with delinquent borrowers, the Bureau’s regulatory definition of delinquency, and the loss mitigation process in general, have on automating and streamlining short and long-term loss mitigation offers?
  • What changes, if any, should be considered relating to the impact that forbearances and other short-term loss mitigation solutions would have on a consumer’s credit reporting?
  • Should standards be set to ensure affordability of long-term loss mitigation solutions? If so, what features of a long-term loss mitigation solution would best help ensure long-term affordability? For example, would term extension, limits on monthly payment increases, or principal forgiveness assist with the goal of long-term affordability?
  • When considering the potential automation and streamlining of short and long-term loss mitigation offers, would there be advantages or drawbacks if more creditors retained servicing of the mortgage loans they originate? Do payment relief advantages exist when an original creditor retains servicing of a mortgage loan? If so, should the Bureau consider ways to encourage originators to retain the servicing of mortgage loans?
  • When considering the potential automation and streamlining of short and long-term loss mitigation offers, are there particular issues or would any particular approaches be more effective for certain types of homeowners, such as servicemembers, older adults, and first-time homeowners?
  • Other than the mortgage products already mentioned in this RFI, are there other mortgage products or features of mortgage products that could help borrowers weather various financial shocks? What are the advantages or drawbacks of those mortgage products or features of mortgage products?
  • Are there other options not mentioned in this RFI that could help achieve the goal of reducing risk for homeowners who are facing financial hardship? If so, what are those options?

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

NASCUS Legislative and Regulatory Affairs Department
October 5, 2022

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

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

Summary

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

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

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

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

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

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

Proposed Rule Provisions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

NASCUS Legislative and Regulatory Affairs Department
September 27, 2022

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

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

Summary

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

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

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

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

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

Proposed Rule Provisions

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

Summary: Ensuring Responsible Development of Digital Assets

Prepared by NASCUS Legislative & Regulatory Affairs Department
September 2022

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

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

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

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

The Request for Comments

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

A. Illicit Finance Risks

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

B. AML/CFT Regulation and Supervision

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

C. Global Implementation of AML/CFT Standards

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

D. Private Sector Engagement and AML/ CFT Solutions

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

E. Central Bank Digital Currencies (CBDC)

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

Letter to Credit Unions 22-CU-11
NCUA to Begin Phase 3 of Resuming Onsite Operations

NASCUS Legislative and Regulatory Affairs Department
September 20, 2022

On September 20, 2022, the National Credit Union Administration (NCUA) issued Letter to Credit Unions 22-CU-11 announcing its resumption of onsite examination and supervision activity in all locations.  This letter represents the implementation of Phase 3 of the transition into a post Covid-19 onsite supervision environment, with previous actions of Phase 1 announced through Letter 21-CU-06 (July 2021) and Phase 2 through Letter 22-CU-06 (April 2022).

Summary

Implementation of NCUA’s Phase 3 response will include the resumption of examination and supervision activity in all locations.  The letter outlines the intent of the NCUA to continue to utilize appropriate offsite review processes developed during the pandemic when those processes can be completed efficiently and effectively as part of a hybrid examination process.

Further, NCUA outlines it will continue to consider challenges a credit union faces as they schedule examinations and scope the onsite and offsite portions of an examination.

The agency also outlined that the health and safety of agency and credit union staff will be paramount in its decision making and NCUA staff are generally expected to comply with credit unions policies to the extent they exceed the NCUA’s Phase 3 safety protocols and do not conflict with local, state, or federal laws, infringe on employee rights or restrict access to a credit unions books and records.  NCUA will continue to coordinate with State Supervisory Agencies when working onsite in FISCUs.

The agency also announced that while its offices are generally open to the public, they will continue to operate under heightened safeguards.  Finally, the letter states NCUA will continue to closely monitor the pandemic environment for further appropriate action to address any potential challenges that may arise and any changes to the NCUA’s stance will be publicly announced as enacted.

Letter to Credit Unions 22-CU-10
Simplified CECL Tool for Credit Unions

NASCUS Legislative and Regulatory Affairs Department
September 15, 2022

On September 14, 2022, NCUA issued Letter to Credit Unions 22-CU-10, Simplified CECL Tool for Credit Unions, to provide a tool to assist small credit unions with determining their allowance for credit losses (ACL) on loans and leases as required under Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses, referred to as Current Expected Credit Losses (CECL). The tool is designed for credit unions with less than $100 million in assets. NCUA notes the tool can be used by larger credit unions based on the discretion of their management and auditors. The CECL Tool includes functionality for a credit union to calibrate assumptions to its circumstances.

The CECL Tool and its supporting documentation are available on the NCUA’s CECL Resources page.

The letter includes links to the following resources:

Summary

The CECL Tool, which utilizes the Weighted Average Life Maturity (WARM) methodology, is one of many options available for credit unions to calculate the ACL as required under CECL.  The WARM methodology represents one acceptable approach for smaller, less complex pools of assets, however, NCUA states that each credit union should determine which approach best fits its portfolio.

The tool calculates the ACL for a loan portfolio category by multiplying the period-end loan portfolio balance, the average annual charge-off rate, and the WARM factor (Appendix A). Loan portfolio categories parallel those in the NCUA Call Report (Appendix B). The tool also provides the related WARM factor derived from loan-level data of like-sized credit unions and vetted to provide a relevant factor for each loan portfolio category. Credit unions are directed to Appendix C to adjust the charge-off rate and the WARM factor using qualitative factors.

The letter directs credit unions and their auditors to the Frequently Asked Questions and Model Development Documents for rationale, assumptions and other analyses that support the tool’s use for calculating the allowance for credit losses on loans and leases.

The CECL Tool’s data will be updated each quarter-end, beginning September 30, 2022, to provide updated WARM factors that reflect current market conditions.

NCUA stresses that the letter and tool do not constitute legal, or accounting advice and credit unions should consult with their accounting advisors in order to determine whether the tool is appropriate for use in determining the allowance for credit losses on loans and leases, due to the unique make up of each institution.

Letter to Credit Unions 22-CU-09 and Supervisory Letter 22-01 
NCUA Updates to Interest Rate Risk Supervisory Framework

NASCUS Legislative and Regulatory Affairs Department
September 3, 2022

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

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

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

Acronym Glossary:

ENT = estimated NEV tool

IRR = interest rate risk

NEV = net economic value

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

Summary

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

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

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

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

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

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

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

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

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

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

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

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

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

NASCUS Legislative and Regulatory Affairs Department
August 4, 2022

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

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

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

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

Summary

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

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

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

Proposed changes include:

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

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

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

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

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