Small Business Lending Data Collection

Summary: CFPB Proposal Regarding Small Business Lending Data Collection

The Consumer Financial Protection Bureau (CFPB) issued a notice of proposed rulemaking seeking comment on its proposal to implement the small business lending data collection requirements set forth in Section 1071 of the Dodd-Frank Act.  The Bureau is proposing to add new Subpart B to Regulation B to implement Section 1071’s requirements.

Comments are due on the proposed rule within 90 days following the rule’s publication in the Federal Register.  The proposed rule can be found here and the Bureau’s Executive Summary of the proposal can be found here.

Summary:

  • Section 1071 amended the Equal Credit Opportunity Act (ECOA) to require that federal institutions collect and report to the Bureau certain data regarding certain business credit applications. Section 1071’s purposes are to facilitate enforcement of fair lending laws and to enable the identification of business and community development needs and opportunities for women-owned, minority-owned and small businesses.  In particular, Section 1071:
  • Specifies several data points that financial institutions are required to collect and provides authority for the Bureau to require collection of additional data that the Bureau determines would aid in fulfilling Section 1071’s purposes
  • Contains a number of other requirements regarding information collected pursuant to Section 1071, including a requirement that financial institutions restrict certain persons’ access to certain information, requirements regarding maintaining certain information, and requirements regarding publication of data.
  • Directs the Bureau to prescribe such rules and issue such guidance as may be necessary to carry out, enforce and compile data pursuant to Section 1071.
  • Permits the Bureau to adopt exceptions and exemptions to Section 1071’s requirements as the Bureau deems necessary or appropriate to carry out Section 1071’s purposes.
  • The Bureau is proposing that “covered” financial institutions collect and report data regarding covered applications from small businesses. These institutions would also need to meet other requirements regarding covered applications from small businesses.
  • The Bureau is proposing to define a “covered application” as an oral or written request for a covered credit transaction that is made in accordance with procedures used by a financial institution for the type of credit requested. This proposed definition is largely consistent with the existing Regulation B definition of “application,” the Bureau is also proposing that certain circumstances would not be covered applications, even if they are covered applications under existing Regulation B.  Specifically, the Bureau is proposing that a covered application would not include:
  • Reevaluation requests, extension requests, or renewal requests on an existing business credit account, unless the request seeks additional credit amounts, or inquiries and prequalification requests
  • The Bureau is proposing to define a “covered credit transaction” as a transaction that meets the definition of business credit under existing Regulation B. These transactions would include, among other things, loans, lines of credit, credit cards, and merchant cash advances (including such credit transactions for agricultural-purposes and those that are also covered by the Home Mortgage Disclosure Act of 1975 (HMDA).  However, the following would not be considered covered credit transactions even if they satisfy the definition of business credit:
  • Financing arrangements wherein a business acquires goods or services from another business without making immediate payment to the business providing the goods/services;
  • Public utilities credit as defined in Regulation B, 12 CFR 1002.3(a)(1);
  • Securities credit as defined in Regulation B, 12 CFR 1002.3(b)(1); and
  • Incidental credit as defined in Regulation B, 12 CFR 1002.3(c)(1).
  • In addition to the transactions listed above, factoring, leases, consumer-designated credit used for business purposes, and credit secured by certain investment properties would not be covered credit transactions.

Proposed Data Collection/Reporting Requirements

  • A covered financial institution would be required to collect/report certain data regarding covered applications from small businesses.
  • The proposed rule includes data points that financial institution would generate or provide. These data points include a unique identifier for each covered application or covered credit transaction, an application date, the application method, the application recipient, the action taken by the financial institution on the application, and the action taken date.  For denied applications, the institution would need to provide the denial reason(s).
  • The proposal includes data points that could be provided by the applicants or that a financial institution could determine by reviewing information provided by the applicant or a third party. These data points include information specifically related to the credit being applied for (credit type; credit purpose; and the amount applied for) and information related to the applicant’s business (address/location; gross annual revenue for the preceding fiscal year; NAICS code for applicant; number of applicant’s non-owner workers; applicant’s time in business; and the number of applicant’s principal owners).
  • A financial institution would be required to ask for data that addresses the demographics of the applicant’s principal owners or ownership status. These data points include minority-owned business status, women-owned business status and the ethnicity, race and sex of the applicant’s principal owners.  If an applicant does not provide any ethnicity, race or sex information for at least one principal owner, the Bureau is proposing that the financial institution must collect at least one principal owner’s race/ethnicity via visual observation and/or surname if the financial institution meets in person with any principal owners.
  • The proposed rule also includes provisions addressing the collection of data within a “timely” manner, as well as reporting and verification of applicant responses.

Proposed requirements to report data to the Bureau and provisions regarding availability and publication of data

  • The Bureau is proposing that covered financial institutions be required to collect data on a calendar year basis and report their data to the Bureau by June 1st of the following year.
  • The Bureau is proposing a “balancing test” that would assess the risks and benefits of public disclosure
  • Requirement to limit certain persons’ access to certain data
  • The proposed rule includes a provision that limits the employees and officers that have access to certain data. This proposed “firewall” would prohibit an employee or officer of a covered financial institution or a covered financial institution’s affiliate from accessing an applicant’s responses to inquires made pursuant to Section 1071 if that employee/officer is involved in making the determination concerning the applicant’s application unless otherwise provided.
  • This prohibition would not apply to an employee/officer if the covered financial institution determines that is it not feasible to limit that employee’s or officer’s access to an applicant’s response to the covered financial institution’s Section 1071 inquiries.

Proposed recordkeeping requirements and compliance dates

The proposal includes a requirement to retain evidence of compliance, including a copy of small business lending application registers, for at least three years.

The proposal also contains provisions regarding enforcement of violations, bona fide errors and safe harbors.

The Bureau is proposing that the final rule would become effective 90 days after publication in the Federal Register.  However, the compliance date would not take effect until approximately 18 months after the final rule’s publication in the Federal Register.

Request for Information & Comment: Digital Assets & Related Technologies

Prepared by NASCUS Legislative & Regulatory Affairs Department
August 2021

NCUA has issued a Request for Information and Comment (RFI) on Decentralized Finance the effect of digital assets and related technologies on federally insured credit unions (FICUs), third parties, and NCUA. NCUA is particularly interested in input on the current and potential uses of digital assets and related technologies in the credit union system, and the risks associated with them.

NCUA poses questions across four broad categories:

  1. Questions Regarding Usage and Marketplace
  2. Operational Questions
  3. Questions on Supervision and Activities
  4. Questions on Share Insurance and Resolution

The Request for Information may be read in its entirety here. Comments are due to NCUA on September 27, 2021.

Summary

NCUA’s RFI provides a high-level overview of both Decentralized Finance (DeFi) and Distributed Ledger technologies (DLT). DeFi is the broad category of technology applications including:

  • peer-to-peer networks
  • DLT
  • smart contracts
  • digital assets (including cryptos)
  • clearing and settlement systems
  • identity management systems
  • record retention systems

Distributed Ledger Technologies (DLT) are shared electronic databases where copies of the same information are stored on a distributed network of computers. DLTs are designed to ensure data cannot be altered or added to without the consensus of a pre-designated community. As a result, any attempt to modify the information on one computer will not impact the information on other computers. “Blockchains” are one type of DLT.

NCUA notes that while potentially beneficial, the emerging technologies also present risks, including:

  • the permanent nature of the transactions and questions about consumer recourse for fraudulent financial activities
  • possible manipulation in the price of tokens
  • the challenge of lost/forgotten/compromised crypto keys
  • the unregulated nature of the value transfers creates avenues for money laundering or tax avoidance

The RFI poses several specific questions and invites any other relevant comments.

NCUA’s Specific Request for Comment

  1. Questions Regarding Usage and the Marketplace
    1.  How are those in the credit union system currently using or planning to use DLT and DeFi applications?
    2. What, if any, DLT or DeFi applications are those in the credit union system currently engaging in or considering? Please explain, including the nature and scope of the activity. More specifically:
      • What, if any, types of specific products or services related to these technologies are those in the credit union system currently offering or considering offering to members? Are credit union members asking for specific products or services related to these technologies?
      • To what extent are those in the credit union system engaging in or considering DeFi applications or providing services related to digital assets that have direct balance sheet impacts?
      • To what extent are those in the credit union system engaging in or considering DLT for other purposes, such as to facilitate internal operations?
      • To what extent, if any, are those in the credit union system aware of crossjurisdiction or cross-border transactions related to DLT and digital assets.
    3. In terms of the marketplace, where do those in the credit union system see the greatest demand for DeFi application services, and who are the largest drivers for such services?
    4. Are there new developments that might affect use of DeFi applications by those in the credit union system in the future?
    5. Are DeFi applications a competitive threat for those in the credit union system?
    6. What concerns, if any, do those in the credit union system have related to current statutory or regulatory limitations on their ability to utilize DeFi applications? Are there any changes that would influence the credit union system’s ability to utilize DeFi applications?
    7. Apart from anything listed in this Request for Information, what other actions should the NCUA take? Please be as precise as possible, including, but not limited to, necessary regulatory changes, additional guidance, and legal opinions.
  2. Operational Questions
    1. What are the advantages and disadvantages of FICUs developing DLT and DeFi projects through third-party relationships versus through a credit union service organization (CUSO)?
    2. How dependent will FICUs be on third-party software and open-source libraries for their own DLT projects? Questions Regarding Risk and Compliance Management
    3. To what extent are existing risk and compliance management frameworks designed to identify, measure, monitor, and control risks associated with various DLT and DeFi applications? Do some DLT and DeFi applications more easily align with existing risk and compliance management frameworks compared to others? Do, or would, some DLT and DeFi applications result in FICUs developing entirely new or materially different risk and compliance management frameworks?
    4. What unique or specific risks are challenging to measure, monitor, and control for various DLT and DeFi applications? What unique controls or processes are or could be implemented to address such risks?
    5. What unique benefits or risks to operations do FICUs consider as they analyze various DLT and DeFi applications?
    6. How are FICUs integrating, or how would FICUs integrate, operations related to DLT and DeFi applications with legacy FICU systems?
    7. Please identify any potential benefits, and any unique risks, of particular DLT and DeFi applications to FICUs and their members.
    8. What impact will DLT and DeFi applications have on FICUs’ earnings? How will FICUs ensure they account for any negative impact, such as potential lost interchange income as peer-to-peer transactions grow?
    9. How are those in the credit union system integrating these new technologies into their existing Information Technology environment securely, including existing cybersecurity functions and data privacy/data protection policies? How are the risks in this area being evaluated?
    10. What considerations have commenters given to how to maintain continued compliance with State and Federal laws and regulations that may be applicable to various DLT and DeFi applications, including, but not limited to, those governing securities, Bank Secrecy Act (BSA) and anti-money laundering, and consumer protection? Have those obligations, or uncertainty related to potential obligations, impacted commenters DLT and DeFi activities? How do commenters’ DLT and DeFi activities address requirements in these areas?
    11. How specifically do DLT and DeFi projects in the credit union system address BSA and Know Your Customer (KYC) requirements?
    12. How can FICUs address fraud and other consumer protections with an immutable digital ledger? How can FICUs ensure continued compliance with any applicable consumer protection requirements that may arise with various DLT and DeFi applications, such as obligations related to fair lending, electronic funds transfers, and funds availability?
    13. If utilizing/planning to utilize, any of these or related technologies, what steps have been taken in providing the services and what has been done to ensure the services are being utilized safely and in compliance with all applicable laws and regulations? Please describe:
      • The process for developing a sound business case and presenting it to the board of directors for approval;
      • The process for ensuring the consideration of all of the risks & risk categories;
      • The level of due diligence performed on any vendors or third parties and whether the vendors were a new entry in the market or an established technology provider;
      • The process for assessing the quality and level of internal information systems and technology staff to support systems and applications; and
      • The process for developing internal oversight of the program.
  3. Questions Regarding Supervision and Activities
    1. Are there any unique aspects the NCUA should consider from a supervisory perspective?
    2. Are there any areas in which the NCUA should clarify or expand existing supervisory guidance to address these activities?
    3. NCUA § 721 application procedures may be applicable to certain DLT activities. Is additional clarity needed? Would any changes to NCUA’s regulations be helpful in addressing uncertainty surrounding the permissibility of particular types of DLT activity to support FICUs considering or engaging in such activities?
  4. Questions Regarding Share Insurance and Resolution
    1. Are there any steps the NCUA should consider to ensure FICU members can distinguish between uninsured digital asset products and insured shares?
    2. Are there distinctions or similarities between stablecoins (cryptocurrencies that are backed by a currency like the U.S. Dollar and are designed to have a stable value compared to other cryptocurrencies) and stored value products where the underlying funds are held at FICUs and, for which pass-through share insurance may be available to members in limited scenarios?
    3. If the NCUA were to encounter any of the digital assets use cases in the resolution process or in a conservatorship capacity, what complexities might be encountered in valuing, marketing, transferring, operating, or resolving the DeFi activity? What actions should be considered to overcome the complexities?
LTCU 21-CU-08 Implementation of Modernized Systems 
August 2021

NCUA’s LTCU 21-CU-08 provides an update on the agency’s technology modernization efforts supporting NCUA’s examination, data collection, field of membership, and reporting efforts. The new programs and applications are:

  1. NCUA Connect – A central user interface where credit unions can securely interact with the NCUA and the primary entry-point to access MERIT, DEXA, CAPRIS, and the Admin Portal. NCUA anticipates adding more applications in the future to provide a streamlined user experience & a single point of access for NCUA systems. Data and system security is enhanced by layered security, multifactor authentication, and role-based access to applications.
  2. Admin Portal – Provides confirmed, delegated credit union administrative users the ability to manage their credit union’s access to NCUA Connect and NCUA applications, including adding & removing users, and resetting passwords.
  3. Consumer Access Process and Reporting Information System (CAPRIS) – NCUA is replacing its legacy FOM Internet Application (FOMIA) with the new Consumer Access Process and Reporting Information System (CAPRIS). Multiple common bond FCUs will use CAPRIS to submit FOM expansion requests electronically beginning on August 16, 2021.
  4. Data Exchange Application (DEXA) – DEXA is a separate application on NCUA Connect that allows authorized NCUA, SSA, and credit union users to securely upload the credit union member loan and share data requested during an examination. DEXA also provides users with a history of file uploads and data validation reports for any files failing the upload process and implements new loan and share mapping files that help facilitate data visualizations for examiners. DEXA uses the same data schema outlined in LTCU 03-CU05 Expanded AIRES Loan & Share Record Layout.
  5. Modern Examination & Risk Identification Tool (MERIT) – The new examination tool has enhanced analytic capabilities to allow examiners to identify trends and potential risks in credit unions. MERIT allows examiners to document examination results, generate the report issued to the credit union, and formally follow up on examination concerns. MERIT should also facilitate cooperative state/NCUA exam work: reducing redundancy, increasing efficiency, and improving communication. New features in MERIT include:
    • Document Request List Surveys
      MERIT’s “survey” function allows NCUA and state examiners to send credit unions document request lists (“surveys”) and for credit unions to transfer documents securely back to the examiners. Additionally, users can generate several survey inventory reports. Through these reports, users can see historical MERIT survey requests, open the survey form, and view all related documents and comments provided to the examiner.
    • Electronic Delivery of Examination Reports
      Allows examiners to securely send examination reports to credit union management at the conclusion of the exam.7Authorized staff and officials may access MERIT and download the examination report from their dashboard, providing an easy and efficient way to access official reports. MERIT also retains a history of reports, allowing credit unions to view and download historical reports sent through the system, as needed.
    • Examination Concerns Tracking & Response Workflows
      Allows credit unions to track outstanding exam concerns, document resolution progress, and send updates to the examiner. If additional time is needed to address an issue, credit unions can use MERIT to request due date extensions.

Accessing the New Applications

To access NCUA’s new systems, credit unions must submit names of 1 or 2 staff to NCUA to be approved as Admin Portal Administrators who will be responsible for managing the users for the credit union. Once approved and confirmed by the NCUA, administrators can add other users and grant access to the systems for other credit union staff. Administrator requests should be submitted to NCUA’s technical support team at [email protected].

For MERIT and DEXA, credit unions should wait until they are notified of their first exam in MERIT before requesting and obtaining access to DEXA. NCUA notes that user accounts are locked after a period of inactivity, and user access would need to be restored once notified of an upcoming examination.

Training

NCUA will provide credit union user training through various avenues, including:

Information Security

  1. NCUA new systems are built on infrastructure that is certified by the Federal Risk and Authorization Management Program (FedRamp) “cloud” security certification process. Data in the system is protected by denial of service mitigation and multi-layer encryption of information in transit as well as at rest.
  2. NCUA has implemented strong administrative and physical controls including, but not limited to, rules of behavior, physical and personnel security, configuration management control, and routine security training.
  3. As a federal agency, the NCUA must also comply with security standards for federal information and information systems, including all National Institute of Standards and Technology (NIST) standards and guidelines, OMB, and federal laws, such as the Federal Information Security Management Act.
  4. Additional information on NCUA’s standards and controls governing the collection of examination and supervision information can be found here.

 

Letter to Credit Unions 21-CU-07 Capitalization of Unpaid Interest
August 2021

Effective July 30, 2021, NCUA has lifted the prohibition on federally insured credit unions (FICUs) capitalization of interest in connection with loan workouts and modifications from part 741, Appendix B. Modification options include lowering of loan payments or the interest rate, extending the maturity date, partial principal or interest forgiveness, and capitalization of interest. Such modifications may allow a borrower to repay the loan, which helps the borrower and the credit union avoid the costs of default and foreclosure. NCUA also provides a link to FAQs on Capitalization of Unpaid Interest.

The new final rule continues to prohibit credit unions from financing credit union fees and commissions, however they will be permitted to continue to make advances to cover third-party fees to protect loan collateral, such as force-placed insurance or property taxes.

Consumer Protection

To help ensure loan modifications aren’t detrimental to members, the final rule requires credit unions to adopt policies and procedures to ensure that loan modifications are in the long-term best interest of the borrowers. Furthermore:

  • All documentation, including required disclosures, must be accurate, clear and conspicuous, and consistent with applicable federal and state laws and regulations.
  • Any adverse credit reporting must be accurate and comply with FCRA requirements and applicable state law.
  • Credit unions must comply with § 4021 of the CARES Act which requires pandemic related loan modifications be reported as “current” (or as the status reported before the modification).

Credit Risk Considerations

The final rule includes credit risk safeguards. When determining the terms of a modification, credit unions should document why capitalizing interest is the best course of action. The rule also requires the credit union’s policy:

  • Ensure that loan workout decisions are based on a borrower’s renewed willingness and ability to repay.
  • Establish limits on the number of modifications permitted for an individual loan. If a credit union restructures an individual loan more than once a year or twice in 5 years, examiners will expect the documentation reflecting borrower’s continued willingness and ability to repay the loan.

 

21-RA-08 CFPB Amends Mortgage Servicing Requirements for Borrowers Affected by the COVID-19 Emergency
July 2021

NCUA issued Regulatory Alert to discuss the CFPB’s final rule temporarily amending certain mortgage servicing requirements under Regulation X to provide borrowers affected by COVID-19 economic dislocation enhanced foreclosure protections. The final rule only applies to servicers that service mortgages secured by a borrower’s principal residence (and does not apply to small servicers, defined by Reg Z § 1026.41(e)(4) as a servicer that, together with any affiliates, services 5,000 or fewer mortgage loans for which the servicer or an affiliate is the creditor or assignee.

The rule is effective August 31, 2021, however CFPB notes that servicers are free to implement the rule early. Among the enhanced protections offered by the final rule are the following:

  • Amends § 1024.31 to Define COVID-19 Related Hardship – Defines COVID-19 related hardship to mean “a financial hardship due, directly or indirectly, to the national emergency for the COVID-19 pandemic declared in Proclamation 9994 on March 13, 2020 (beginning on March 1, 2020) and continued on February 24, 2021…”
  • Modifies § 1024.39 Early Intervention Requirements – Temporarily modifies early intervention live-contact messages and reasonable diligence obligations to help ensure that borrowers experiencing a COVID-19 related hardship have timely and accurate information about loss mitigation options.
  • Amends § 1024.41 to Permit Modifications Based on Incomplete Application – The final rule authorizes servicers to offer loan modifications to borrowers experiencing a COVID-19 related hardship based on an evaluation of an incomplete application if specified criteria are met.
  • Establishes Temporary COVID-19 Loss Mitigation Procedural Safeguards in § 1024.41 – To ensure that a borrower has a meaningful opportunity to pursue loss mitigation options, from August 31, 2021 – December 31, 2021, unless an exception applies, a servicer must meet at least one of the safeguards specified in the rule before initiating any judicial or non-judicial foreclosure process where a borrower became more than 120 days delinquent on or after March 1, 2020, and the applicable state statute of limitations regarding foreclosures expires on or after January 1, 2022.

NASCUS note: For a more detailed review of the final rule than the Regulatory Alert, see this excellent analysis by Ballard Spahr LLP.

Protections for Borrowers Affected by the COVID-19 Emergency Under the Real Estate Settlement Procedures Act (RESPA), Regulation X
April 2021

 

CFPB Summary re: Protections for Borrowers Affected by the COVID-19 Emergency Under RESPA/Regulation X

12 CFR Part 1024

The Consumer Financial Protection Bureau (CFPB) is issuing this final rule to amend Regulation X to assist mortgage borrowers affected by the COVID-19 emergency.  The final rule establishes temporary procedural safeguards to help ensure that borrowers have a meaningful opportunity to be reviewed for loss mitigation before the servicer can make the first notice or filing required for foreclosure on certain mortgages.  In addition, the final rule would temporarily permit mortgage servicers to offer certain loan modifications made available to borrowers experiencing a COVID-19 related hardship based on the evaluation of an incomplete application.  The Bureau is also finalizing certain temporary amendments to the early intervention and reasonable diligence obligations that Regulation X imposes on mortgage servicers.

The final rule becomes effective on August 31, 2021.  The final rule can be accessed here.

A number of federal and state protections have been established through out the pandemic to provide protections to struggling borrowers.  Those protections are slated to phase out over the summer and the Bureau is concerned there will be historically high numbers of borrowers seeking assistance from servicers, which could lead to delays and errors as servicers work to process a high volume of loss mitigation inquiries and applications.

The final rules include five key amendments to Regulation X, all of which encourage borrowers and servicers to work together to facilitate review for foreclosure avoidance options.

  • The final rule establishes temporary special COVID-19 procedural safeguards that must be met for certain mortgages before the servicer can make the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process because of a delinquency. This requirement generally is applicable only if (i) the borrower’s mortgage loan obligation becomes more than 120 days delinquent on or after March 1, 2020, and (ii) the statute of limitations applicable to the foreclosure action being taken in the laws of the State or municipality where the property securing the mortgage loan is located expires on or after January 1, 2022.
  • The final rule permits servicers to offer certain streamlined loan modification options made available to borrowers with COVID-19 related hardships based on the evaluation of an incomplete loss mitigation application. Eligible loan modifications must satisfy certain criteria that aim to establish sufficient safeguards to help ensure that a borrower is not harmed if the borrower chooses to accept an offer of an eligible loan modification based on the evaluation of an incomplete application.
  • To be eligible, the loan modification may not cause the borrower’s monthly required principal and interest payment to increase and may not extend the term of the loan by more than 480 months from the date the loan modification is effective.
  • If the loan modification permits the borrower to delay paying certain amounts until the mortgage loan is refinanced, the mortgaged property is sold, the loan modification matures, or for a mortgage loan insured by the FHA, the mortgage insurance terminates, those amounts must not accrue interest
  • The loan modification must be made available to borrowers experiencing a COVID-19 related hardship.
  • The borrower’s acceptance of an offer of the loan modification must end any preexisting delinquency on the mortgage loan or the loan modification must be designed to end any preexisting delinquency on the mortgage loan upon the borrower satisfying the servicer’s requirements for completing a trial loan modification plan and accepting a permanent loan modification.
  • The servicer may not charge any fee in connection with the loan modification and must waive all existing late charges, penalties, stop payment fees, or similar charges that were incurred on or after March 1, 2020, promptly upon the borrower’s acceptance of the loan modification. If the borrower accepts an offer made pursuant to this new exception, the final rule excludes servicers from certain requirements with regard to any loss mitigation application submitted prior to the loan modification offer.
  • However, if the borrower fails to perform under a trial loan modification plan offered pursuant to the proposed new exception or requests further assistance, the final rule requires servicers to immediately resume reasonable diligence with regard to any loss mitigation application the borrower submitted prior to the servicer’s offer of the trial loan modification plan and to provide the borrower with the acknowledgement notice required by Section 1024.41(b)(2).
  • The final rule amends the early intervention obligations to help ensure that servicers communicate timely and accurate information to borrowers about their loss mitigation options during the current crisis. In general, the final rule requires servicers to discuss specific additional COVID-19 related information during live contact with borrowers under existing Section 1024.39(a) in two circumstances: (i) if the borrower is not in a forbearance program and (ii) if the borrower is near the end of a forbearance program made available to borrowers experiencing a COVID-19 related hardship.  Unless the borrower states they are not interested, the servicer must also list and briefly describe to the borrower forbearance programs made available at that time and the actions the borrower must take to be evaluated.
  • The final rule clarifies servicers reasonable diligence obligations when the borrower is in a short-term payment forbearance program made available to a borrower experiencing a COVID-19 related hardship based on the evaluation of an incomplete application. Specifically, the final rule specifies that a servicer must contact the borrower no later than 30 days before the end of the forbearance period if the borrower remains delinquent to determine if the borrower wishes to complete the loss mitigation application and proceed with a full loss mitigation evaluation.  If the borrower requests further assistance, the servicer must exercise reasonable diligence to complete the application before the end of the forbearance program period.

 July 26, 2021

Melane Conyers-Ausbrooks
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314

Re: NASCUS Comments on Policy for Setting the Normal Operating Level

Dear Secretary Conyers-Ausbrooks:

The National Association of State Credit Union Supervisors (NASCUS)[1] submits this letter in response to the National Credit Union Administration’s (NCUA) request for comments on the Policy for Setting the Normal Operating Level (NOL) of the National Credit Union Share Insurance Fund (NCUSIF or SIF).[2] NCUA seeks comments on both the modeling methodology utilized to inform the NCUA Board’s determination of the NOL as well as the policy for notice and public comment on changes to the NOL. As discussed below, NASCUS supports a counter-cyclical approach to funding the NCUSIF based on annual modeling utilizing scenarios developed by the Federal Reserve. Furthermore, given the cost of maintaining the NCUSIF’s equity ratio at the NOL as determined by the NCUA Board is borne by credit union stakeholders, we believe the policy of notice and public comment before any change of 1 basis point or greater in the NOL should be maintained.

When NCUA promulgated the current policy in 2017, the agency received 663 comment letters providing feedback and recommendations.[3] It is unsurprising that NCUA received so many comments. For many credit unions, the NCUSIF deposit and obligation to maintain the SIF’s equity ratio at the NOL is one of the largest risk exposures (or opportunity costs) they face.

As our comments in response to the 2017 proposal to close the Temporary Corporate Credit Union Stabilization Fund reflect, NASCUS appreciates that for credit union stakeholders, the SIF is comprised of credit union money: monies that could be deployed to benefit members.[4] NASCUS also fully appreciates that NCUA, as administrator of the NCUSIF, has a duty to ensure the SIF is sufficiently capitalized to cover losses in the system when credit unions fail and must answer for any shortfalls.

Any discussion of the appropriate NOL at which to maintain the NCUSIF and the policy for making that determination is incomplete without acknowledging that the actual equity ratio of the SIF is inextricably tied to NCUA’s budget and the Overhead Transfer Rate (OTR). The simple fact is that NCUA has withdrawn over $1.7 billion from the SIF in the past decade ($1 billion of that in just the past 5 years) to fund agency operations.[5] Without question, the NCUSIF should fund its own administration and a robust supervisory program that identifies and mitigates material risk in the federally insured credit union system. But the fact remains that an elevated NOL, combined with the OTR, cannibalizes SIF investment earnings and denies credit unions SIF distribution opportunities.[6]

Viewed in this context, stakeholder apprehension about an elevated NOL is understandable. Should NCUA determine that an elevated NOL is absolutely necessary, the agency should take steps to reduce the OTR, restoring millions of dollars toward maintaining the NOL and increasing the potential for distributions to stakeholders.

Public Comment

As previously noted, the setting of the NOL directly affects the potential of returning funds to stakeholders. For that reason, we believe it is sound public policy to provide stakeholders the opportunity to participate in considerations of even modest 1 basis point adjustments to the NOL, as well as on the OTR and other adjustments or changes to the NCUSIF.

Modeling

Historically, the NCUSIF has performed well under its traditional modeling and operating levels. NASCUS supports use of a moderate recession as the model for the performance of the SIF. We also support use of the Federal Reserve baseline and adverse (when available) scenarios to test the model. NASCUS encourages NCUA to factor into its modeling the historical performance of the NCUSIF and the credit union system to better calibrate the true needs of the SIF while returning as much money to credit unions as prudent for deployment in service of members.

With respect to the length of the modeling period, NASCUS would support a 3-5 year period. In 2017, NCUA adopted a 5-year period in large part because of the calculations of the

National Bureau of Economic Research and to align with the corporate credit union resolution plan.[7] Given the maturation of the NCUA Guaranteed Notes (NGNs), there is no longer a compelling reason to aligning the modeling period to that program. While aligning with the National Bureau of Economic Research remains a compelling benchmark, aligning to the 3-year period utilized by the Federal Reserve in developing its baseline and adverse scenarios is also a compelling benchmark for NOL modeling. We encourage NCUA consider aligning with the Federal Reserve timeline.

Next to setting the OTR, establishing the NOL is one of the most consequential policy determinations administered by the NCUA. Over the past several years, NCUA has taken steps to bring more transparency to the OTR and NCUSIF. NASCUS applauds and supports those efforts. We encourage NCUA to continue enhancing the transparency related to the accounting of the NCUSIF, the OTR, and modeling and factors contributing to the determination of the NOL.

NASCUS commends NCUA for seeking stakeholder input and for carefully considering our perspectives and recommendations. We are happy to discuss our comments further at your convenience.

Sincerely,

Brian Knight
Executive Vice President & General Counsel

[1] NASCUS is the professional association of the nation’s 45 state credit union regulatory agencies that charter and supervise over 2,000 state credit unions. NASCUS membership includes state regulatory agencies, state chartered and federally chartered credit unions, and other important stakeholders in the state system. State chartered credit unions hold over half of the $1.97 trillion assets in the credit union system and are proud to represent nearly half of the 126 million credit union members.

[2] “Policy for Setting the Normal Operating Level” 86 Fed. Reg. 28155 (May 25, 2021).

[3] “Closing the Temporary Corporate Credit Union Stabilization Fund and Setting the Share Insurance Fund Normal Operating Level” 82 Fed, Reg. 46298 (October 4, 2017).

[4] See https://www.nascus.org/wp-content/uploads/2019/06/08.31.17-TCCUSF-1.pdf

[5] Audited Financial Statements of NCUA Operating Fund, FY2000 – FY2020.

[6] 12 U.S.C. §1782(c)(3).

[7] 82 Fed, Reg. 46307 (October 4, 2017).

 

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

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

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

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

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

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

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

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

Click here to access.

Final Rule Summary: Transition to CECL (Part 702)                 

Prepared by NASCUS Legislative & Regulatory Affairs Department
June 2021

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

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

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

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

Summary

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

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

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

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

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

The Phase-In

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

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

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

NCUA Oversight

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

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

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

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

Prepared by NASCUS Legislative & Regulatory Affairs Department
June 2021

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

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

Summary

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

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

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

Specifically, NCUA informs credit unions:

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