Regulator Staff Archives - Page 27 of 31

Letters to Credit Unions 20-CU-07 Summary of the Coronavirus Aid, Relief, and Economic Security (CARES) Act

April 2020

NCUA published LTCU 20-CU-07 to summarize HR 748, the Coronavirus Aid, Relief, and Economic Security (CARES) Act provisions that affect credit unions.

Central Liquidity Facility (CLF) (§ 4016)

The CARES Act made changes to NCUA’s Central Liquidity Facility (CLF) that will sunset on December 31, 2020. The CLF was created by Title III of the Federal Credit Union Act (FCUA) and governed by Part 725 of the NCUA Rules & Regulations. Information on the CLF may be found on the NCUA’s CLF Page. Four changes were made to the CLF:

Corporate credit unions were granted temporary access to the CLF. The CARES Act removed the FCUA’s “primarily serving natural persons” requirement which had prohibited corporate credit union access.
The CLF’s membership rules were amended to make it easier for a corporate credit union to serve as an agent for natural person credit union members by allowing the corporate to only pay the subscription of its credit union members that want access to the CLF instead of all of its members.
The prohibition against approval of application “intended to expand the balance sheet” was replaced with a requirement the applicant first make reasonable efforts to use primary sources of liquidity, including balance sheet and market funding sources.
The NCUA’s CLF borrowing authority was increased to 16x the subscribed capital stock and surplus of the CLF.

Insured Deposits Threshold (§ 4008(b)):

NCUA may, in coordination with the FDIC, raise the share insurance limit on any non-interest bearing transaction accounts in FICUs until December 31, 2020. NCUA will evaluate whether an increase is needed as the COVID-19 pandemic evolves.

Temporary Relief from Troubled Debt Restructurings (§ 4013):

The CARES Act permits financial institutions to suspend the requirement to categorize certain loan modifications related to the COVID-19 pandemic as troubled debt restructurings. NCUA has issued a separate statement on the TDR issue.

Paycheck Protection Program (§ 1102 and § 1109):

The CARES Act authorized SBA to create the Paycheck Protection Program (PPP), a loan guarantee program that helps qualifying small businesses meet payroll needs & utilities resulting from the COVID-19 pandemic. NCUA has released separate guidance on this program. More information may also be found at the United States Treasury and Small Business Administration websites.

Optional Temporary Relief from CECL (§ 4014):

The CARES Act delays compliance with CECL (FASB Update No. 2016-13 “Measurement of Credit Losses on Financial Instruments”) until December 31, 2020. However, credit unions are not currently required to comply with CECL.

Credit Protection During COVID-19 (§ 4021):

The CARES Act requires institutions reporting to the credit bureaus to report loan modifications resulting from the COVID-19 pandemic as “current” or as the status reported before the accommodation unless the consumer becomes current. This requirement applies throughout the period of accommodation so long as the borrower fulfills requirements of the forbearance or modification.

Foreclosure Moratorium on Single Family Mortgages and Consumer Right to Request Forbearance (§ 4022):

The CARES Act prohibits foreclosures on all single family, federally backed mortgage loans for 60 days, beginning on March 18, 2020, and ending on May 17, 2020. It provides up to 180 days of forbearance for borrowers of a federally backed mortgage who experience a financial hardship related to the COVID-19 pandemic. This relief ends on the earlier of 12/31/2020 or when the COVID-19 health emergency is terminated.

Forbearance of Residential Mortgage Loan Payments for Multifamily Properties with Federally Backed Loans (§ 4023):

The CARES Act provides up to 90 days’ forbearance for borrowers with a federally backed, multifamily mortgage loan who experience a financial hardship. Borrowers who receive forbearance may not evict or charge late fees to tenants for the duration of the forbearance period. This relief ends on the earlier of December 31, 2020 or when the COVID-19 public health emergency is terminated.

Letters to Credit Unions 20-CU-06 Loan Programs to Help Small Businesses and Members During the COVID-19 Pandemic

April 2020

NCUA’s LTCU 20-CU-06 provides credit unions information on the SBA’s Payroll Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) program. SBA has issued an interim final rule outlining the PPP effective upon publication in the Federal Register and open for public comment for 30 days after publication.

Small businesses may apply for PPP loans beginning 4/3/2020 and independent contractors/self-employed individuals may apply beginning 4/10/2020. Borrowers may apply through 6/30/202 or until all available PPP funds are exhausted.

NCUA asserts the agency will not criticize credit unions that make a good faith effort to administer the SBA programs to assist members in a prudent manner.

Paycheck Protection Program

Although the PPP will be administered by the SBA’s 7(a) loan program, there are several substantive differences between PPP and traditional 7(a) loans:

Unlike a 7(a) loan, PPP loans are 100% guaranteed (as such, the loans do not count toward the commercial loan cap)
The full principal amount of a PPP loan may qualify for loan forgiveness
PPP loans may be as large as $10 million (twice the amount of a 7(a) loan)
PPP loans will be available to eligible borrowers on a first-come/first-served basis
Lenders must comply with the applicable lender obligations set forth in the interim final rule but will be held harmless for any borrower’s failure to comply with program criteria
Lender Eligibility Criteria

current SBA 7(a) lenders are automatically approved to make PPP loans. Other FICUs may apply to lend under the PPP by submitting a CARES Act Section 1102 Lender Agreement and will be automatically approved to participate so long as they are not in troubled condition or under enforcement action. The SBA’s interim rules also have qualification procedures for CUSOs to make loans.

Note: “Financial businesses primarily engaged in the business of lending…” cannot borrow under the PPP due to SBA regulations.

Loan Terms

Differences in loan terms, conditions, processes and guarantees between PPP and other 7(a) loans include:

Loan Amount	Maximum PPP loan amount is $10 million
Majority	PPP loan maturity is 2 years
Repayment	PPP repayment commences 6 months from the date of disbursement
Lender Guarantee	PPP guarantee is 100%
Collateral	No PPP collateral is required
Interest Rate	PPP interest rate is 100 basis points or 1%
Processing	PPP loans will be processed by all lenders under delegated authority and lenders are permitted to rely on borrower certifications to determine borrower eligibility and the use of loan proceeds
Personal Guarantee	PPP does not require borrower’s personal guarantee

Processing: Loan Forgiveness

Loan forgiveness under the PPP can include the full principal amount as well as accrued interest. The forgiveness is subject to limitations on use of funds and conditions in the SBA’s interim rule. The SBA will also be issuing additional guidance on loan forgiveness in the future.

Lender Compensation

Lender compensation from the SBA for processing PPP loans will be based on loan balance outstanding at the time of final disbursement:

Loans $350k and less	5%
Loans Greater than $350k up to $2 m	3%
Loans Greater than $2m	1%

COVID-19 Economic Injury Disaster Loans

Small businesses affected by COVID-19 may also be eligible for additional assistance through the SBA’s Economic Injury Disaster Loan. These loans can be up to $10,000 and do not have to be repaid.

Letters to Credit Unions 20-CU-05 Offsite Examination and Supervision Approach

March 2020

NCUA issued LTCU 20-CU-05 to outline for credit unions the agency’s approach to examination and supervision during the COVID-19 pandemic. Through May 1, 2020 NCUA examinations will take place offsite (see Priority #3 below). NCUA will strive to limit the agency’s burden on credit unions so that credit unions “may focus on providing uninterrupted service to their members.”

During this time, NCUA will focus on the following priorities:

Priority 1 — Credit Unions Experiencing Problems – NCUA’s supervision will focus on credit unions experiencing significant financial or operational problems.

Priority 2 — Contacting All Credit Unions – Between March 30 and April 10, NCUA will contact each credit union to establish a baseline of condition. NCUA will then periodically reach out to credit unions to touch base on the credit union’s condition.

***NASCUS Note: NCUA Regional Directors should be in communication with state regulators to coordinate contacts with state credit unions.

Priority 3 — Conduct Examinations Offsite – NCUA has moved to remote examinations. Unless the NCUA Executive Director approves a specific information request, credit unions will not be required to answer requests from NCUA examiners.

NCUA’s COVID-19 pandemic supervision plan’s key elements:

Exceptions to remote exams must be approved by the NCUA’s Executive Director.
NCUA may still go onsite to deal with urgent safety & soundness matters.
Credit unions are not required to provide documentation or make staff available for discussions with examiners unless approved by the Executive Director.
NCUA staff may contact a credit union for information needed to complete offsite exams. Examiners may also schedule virtual meetings with credit unions to discuss an examination if the credit union is willing and able to do so.
NCUA will generally not be issuing ROEs until further notice unless an existing exam was mostly completed before 3/16/20.
Once ROEs begin to be issued in the future, NCUA will factor into expectations for corrective action the impact of the pandemic on the credit union’s condition.
A credit union should work with its examiner if it requires flexibility in meeting deadlines.

NCUA will continue to coordinate with state regulators. Throughout this crisis, NCUA will factor the extraordinary impact of the pandemic on credit union operations and balance sheets.

Letters to Credit Unions 20-CU-04 Responsible Small-Dollar Lending in Response to COVID-19

March 2020

NCUA issued LTCU 20-CU-04 to alert credit unions that NCUA and the other federal financial regulators issued a Joint Statement Encouraging Small Dollar Lending in Response to COVID-19. NCUA encourages credit unions to offer responsible small-dollar loans to consumer and small business members.

NCUA notes that credit unions have the ability to help members meet small dollar needs for unexpected expenses by offering a variety of products such as:

Open-end lines of credit
Closed-end installment loans
Single payment loans

NCUA notes that federal credit unions have the option of offering NCUA PALs I and II loans.

NCUA also encourages credit unions to consider workout strategies designed to help borrowers experiencing financial distress. NCUA stresses that credit unions should offer products in a manner that is safe, sound, and fair to members while complying with all applicable laws and regulations.

The Joint Statement was issued by Federal Reserve Board, the FDIC, the NCUA, the OCC and the CFPB on March 26, 2020. The Statement focused on short term small dollar loans was a follow-up to a March 9, 2020 Joint Statement issued by the agencies encouraging institutions to meet the financial needs of their customers/members impacted by the COVID-19 crisis.

Letters to Credit Unions 20-CU-03 Identification of Essential Critical Infrastructure Workers During COVID-19

March 2020

NCUA released LTCU 20-CU-03 to provide credit unions information on identifying and credentialing essential employees during the COVID-19 pandemic. In an effort to limit the spread of the corona virus, some states and localities have order residents to stay home and limited work schedules.

These limitations on the general public contain exceptions for critical infrastructure workers: organizations, entities, industries, and workers needed to maintain critical services and functions for the public.

Relevant resources on critical infrastructure workers and industries include:

Department of Homeland Security March 19, 2020 CISA Memo
Department of Treasury March 22, 2020 Memorandum for Financial Services Sector

**NASCUS Note: After LTCU 20-CU-03 was issued, Homeland Security issued an updated CISA Memo dated March 28, 2020.

For the financial services and information technology sectors, CISA identified the following essential critical infrastructure workers:

Financial Services

Workers who are needed to process and maintain systems for processing financial transactions and services (e.g., payment, clearing, and settlement; wholesale funding; insurance services; and capital markets activities)
Workers who are needed to provide consumer access to banking and lending services, including ATMs, and to move currency and payments (e.g., armored cash carriers)
Workers who support financial operations, such as those staffing data and security operations centers

The guidance includes lists of other critical sectors and workers including information technology.

NCUA has resources on its website under “Other COVID-19 Resources”.

Letters to Credit Unions 20-CU-02 NCUA Actions Related to COVID-19

March 2020

LTCU 20-CU-02 describes the agency’s initial response to the COVID-19 crisis and refers credit unions to 17 previously issued guidance on disaster recovery, business continuity, and serving distressed communities. This guidance covers: 1) working with members, 2) FAQs, 3) NCUA’s supervision program, and 4) NCUA’s operational status.

1) Working with Members

NCUA examiners will not criticize a credit union’s efforts to provide prudent relief for members when such efforts are conducted in a reasonable manner with proper controls and management oversight. Such efforts may include:

Waiving ATM fees & increasing ATM daily cash withdrawal limits
Waiving overdraft fees & early withdrawal penalties on time deposits
Waiving availability restrictions on insurance checks
Easing restrictions on cashing out-of-state and non-member checks
Easing credit terms for new loans for members who qualify
Offering or expanding payday alternative loan programs
Increasing credit card limits for creditworthy borrowers
Waiving late fees for credit card and other loan balances
Offering payment accommodations such as allowing borrowers to defer or skip some payments, or extending the payment due dates

2) Information Website and Frequently Asked Questions

NCUA has created a page on the agency’s website to host COVID-19 guidance. NCUA has also issued Frequently Asked Questions (FAQ) addressing numerous issues.

3) NCUA’s Examination and Supervision Program

As credit unions implement expanded telework programs and limit external visitors, NCUA will limit examination and supervision work over the coming weeks to offsite procedures only (except for exigent circumstances). In addition:

NCUA Examiners will work with credit union staff to facilitate the secure exchange of information needed to conduct offsite examination work
NCUA will be mindful of the impact examiner requests may have on credit union working to meet the challenges of the COVID-19 crisis
NCUA will be mindful of the impact of COVID-19 on credit union conditions and take that into consideration in evaluating remedial supervisory actions

4) NCUA’s Operational Status

Effective through March 30, 2020, NCUA headquarters and regional office staff will telework. Credit unions should submit information to the NCUA in electronic form to the maximum extent possible. The agency has setup electronic mailboxes in each region and the central office for that purpose. Credit unions should note that NCUA may use “digital certification” signatures on documents.

StateFocus is a monthly NASCUS publication that highlights legislative and regulatory activities in the states. Each edition explores different states and various issues related to the state credit union system.

September 30, 2020 State Focus: What’s Happening in the States?

August 11, 2020 State Focus: What’s Happening in the States?

July 1, 2020 StateFocus: What’s Happening in the States?

May 28, 2020 StateFocus: What’s Happening in the States?

April 21, 2020 StateFocus State Wage Garnishment Guidance

April 16, 2020 StateFocus: State Paycheck Protection Program Guidance

March 31, 2020 StateFocus: State Responses to COVID-19

February 27, 2020 StateFocus: What’s Happening in the States?

January 29, 2020 StateFocus: What’s Happening in the States?

NCUA 2020 Regulatory Review

Prepared by NASCUS Legislative & Regulatory Affairs Department
February 2020

The NCUA’s Office of General Counsel maintains a rolling review schedule that identifies one-third of NCUA’s existing regulations for review each year and provides notice to the public of those regulations under review for public comment.

NCUA’s Regulatory Review is a not an exclusive list of NCUA rulemaking this year. The agency also engages in discretionary rulemaking as it deems necessary.

NCUA’s complete NCUA Regulatory Review (2020) is available on NCUA’s website. NCUA will be reviewing its regulations Part 711 thru Part 747. NASCUS notes that several of these provisions were recently subject to discretionary rulemaking in 2019. However, even though they were recently subject to NCA rulemaking, NASCUS will still submit its views on improvements that may be made to those rules as well.

Part 741 is among the provisions scheduled for review. NASCUS believes the inclusion of § 741 allows for comment on every FISCU rule incorporated by reference.

Comments on NCUA’s 2020 regulatory review are due to NCUA by August 3, 2020.

In 2017, NCUA published a summary of the agency’s evaluation of the Regulatory Review process. That report is available here.[1]

Summary

711 Management Official Interlocks – Applies to FISCUs by incorporation in § 741.209. The Management Interlocks rule generally prohibits an individual from serving in a senior executive position of a credit union and another depository institution (non-credit union).
712 Credit Union Service Organizations (CUSOs) – Applies in part to FISCUs by incorporation in § 741.222. The CUSO rules in Part 712 that apply to FISCUs by incorporation include § 712.2(d)(2)(ii), § 712.3(d), § 712.4 and § 712.11(b) and (c). These are the provisions that require credit unions to maintain corporate separateness from their CUSOs, and to contractually obligate their CUSOs to submit annual reports to NCUA and to provide NCUA and state regulators access to the CUSOs’ books and records.
713 Fidelity Bond and Insurance Coverage for Federal Insured Credit Unions – Applies to FISCUs by incorporation in § 741.201, which directs FISCUs to follow the “minimum fidelity bond coverage stated in part 713.3, 713.5, and 713.6.” NCUA published a new final Fidelity Bond rule in July 2019. The final rule further extended the application of the rule to FISCUs, mandated a board signature on bond contracts, created a sunset of NCUA approval of bond forms, and mandate bond contracts contain an extension of discovery provisions.
714 Leasing – Does not apply to FISCUs.
715 Supervisory Committee Audits and Verifications – Applies to FISCUs by incorporation in § 741.202. These provisions include the requirements that FISCUs obtain either annual supervisory committee audits, or independent audits, depending on their asset size. It also requires verification of accounts at least once every two years. In September 2019, NCUA finalized changes to Part 715 Supervisory Committee rules.
717 Fair Credit Reporting – Does not apply to FISCUs.
721 Incidental Powers – Does not apply to FISCUs.
722 Appraisals – Applies to FISCUs by incorporation in § 741.203. The rule requires FISCUs to obtain written appraisals for commercial real estate transactions involving loans with $1 million+ and residential real estate transactions involving loans of $250k+. NCUA recently proposed raising the residential real estate threshold to $400k.
723 Member Business Loans – Applies to FISCUs by incorporation in § 741.203, Minimum Loan Policy Requirements. In May of 2018, NCUA published a comprehensive rewrite of its MBL rule. In NCUA’s view, the new rule marked a change from a prescriptive approach to a principle-based approach.
724 Trustees and Custodians of Certain Tax-Advantaged Savings Plans – Does not apply to FISCUs.
725 National Credit Union Administration Central Liquidity Facility – Applies to FISCUs by incorporation in § 741.210.
740 Accuracy of Advertising and Notice of Insured Status – Applies to FISCUs by incorporation in § 741.211. These provisions prescribe the official share insurance signage and accuracy in advertising.
741 Requirements for Insurance – References all rules applicable to FISCUs. NASCUS encourages state system stakeholders to include comments on any NCUA FISCU rule incorporated by reference in § 741, as well as to comment on the organization of NCUA’s rules.
745 Share Insurance and Appendix – Applies to FISCUs by incorporation in § 741.212. These provisions describe the amount of coverage and describes the various accounts covered by NCUA administered share insurance.
746 Appeals Procedures – In October 2017, NCUA finalized a new rule, § 746, establishing a formalized appeals process for FICUs in relation to NCUA supervisory determinations. This is the first time this rule has come up for review under NCUA’s Regulatory Review process.
747 Administrative Actions, Adjudicative Hearings, Rules of Practice and Procedure, and Investigations – Applies to FISCUs by incorporation in § 741.3(a) and § 741.213. NCUA’s §747 is made up of subparts A-M. Of these, subpart E applies only to FCUs. The remaining subparts, applicable to FISCUs, include the following:
- Subpart A addresses the administrative procedure related to, and due process afforded, credit unions subject to an administrative order by NCUA. The provisions create recourse to an administrative law judge and the right of parties to have counsel and call witnesses.
- Subparts B & C limit discovery to document production, controls the adjudication of NCUA liquidation orders, and provides that NCUA may terminate insurance for 1) Engaging or having engaged in unsafe or unsound practices, is in unsafe or unsound condition, or has violated any applicable law, regulation, or order.
- Subpart D provides for removal of official charged in state or federal court for a crime of dishonesty.
- Subpart G allows a prevailing party to seek attorney fees.
- Subpart H governs investigations conducted by the NCUA Board or its designee.
- Subpart I governs witnesses in an NCUA investigation.
- Subpart J applies to a credit union’s notice to NCUA to add or replace an official pursuant to § 1790a and § 700.2 where the credit union either has been chartered less than 2 years; or is in “troubled condition,” as defined by §701.14.
- Subpart K requires NCUA to adjust CMPs to the rate of inflation.
- Subpart L establishes the rules & procedures for FICUs subject to discretionary action under PCA. Credit unions are provided the right to a hearing before the NCUA board and the right to call witnesses. Credit unions may also seek the determination of the NCUA Ombudsman. Subpart L also requires NCUA copy state regulators all related notices to a SCU under the provision.
- Subpart M establishes the rules and procedures for NCUA’s imposition of discretionary PCA actions against a corporate credit union.

[1] NASCUS has been told NCUA will no longer publish these summaries of the previous year’s Regulatory Review process.

NCUA Proposed Rule: Subpart D to Part 708a Combination Transactions with Non-Credit Unions; Credit Union Asset Acquisitions

Prepared by NASCUS Legislative & Regulatory Affairs Department
February 2020

NCUA is proposing to add a new Subpart D to § 708a of its Rules & Regulations to clarify the NCUA’s procedures and the requirements related to transactions where a federally insured credit union (FICU) assumes the assets and liabilities of a bank or other non-credit union entity (combination) or where the FICU merges or otherwise consolidates with a non-credit union entity. Existing § 708a applies to federally insured state credit unions (FISCUs) by reference in § 741.208.[1]

The proposed Subpart D would be comprised of the following 5 sections:

708a.401 Definitions
708a.402 Approval Required for Combination Transactions
708a.403 Submission to the NCUA
708a.404 Assumption of Deposits; Federal Share Insurance Required
708a.405 Federal Credit Union Membership

NCUA proposes applying all provisions to FISCUs except proposed § 708a.405.

The proposal would also amend § 741.8 of the NCUA’s regulations to clarify other applicable regulations and apply a 6 factor test for approval for § 741.8 transactions.

The proposed rule may be read here. Comments are due to NCUA March 30, 2020.

Summary

The incidents of FICUs purchasing some, or all, of the assets and liabilities of a bank remain relatively rare with respect to the annual number of credit union mergers and the number of intra bank M&A activities.

	CU Purchased All Bank Assets & Liabilities	CU Purchased Some of the Bank Asset and Liabilities (for example branches)	Bank M&A Activity in the Given Year
2020	9 pending (2/1/20)	8 pending (2/1/20)	—-
2019	11	4	179
2018	7	1	249
2017	3	1	261
2016	2	4	247
2015	2	1	284
2014	1	1	303
2013	2	3	252

Until now, the only NCUA rule on point was § 741.8 which requires NCUA Regional Director (RD) approval before a FICU may assume an assignment of deposits, shares, or liabilities from and privately insured credit union or any bank or other non-FICU depository entity. NCUA notes that the experience it has gained in approving the 43 previous transactions informs the current proposed rulemaking.

NCUA is also proposing to expand § 741.8 to apply to all asset purchases, not only loan purchases and liability assumptions. NCUA notes that in reviewing credit union/bank combination transactions, its staff have occasionally identified non-loan assets that are problematic, either because they are impermissible for FICUs or because they would pose undue risk to the FICU. [emphasis added by NASCUS]

The Federal Credit Union Act

Section 205 of the Federal Credit Union Act (FCUA) states:

Except as provided in paragraph (2), no insured credit union shall, without the prior approval of the Board— (A) merge or consolidate with any noninsured credit union or institution; (B) assume liability to pay any member accounts in, or similar liabilities of, any noninsured credit union or institution; (C) transfer assets to any noninsured credit union or institution in consideration of the assumption of liabilities for any portion of the member accounts in such insured credit union; or (D) convert into a noninsured credit union or institution.
See 12 U.S.C 1785(b)(1)

Pursuant to the FCUA, when considering whether to approve an assumption of liabilities as described above, the NCUA Board must consider 6 factors:

the history, financial condition, and management policies of the credit union
the adequacy of the credit union’s reserves
the economic advisability of the transaction
the general character and fitness of the credit union’s management
the convenience and needs of the members to be served by the credit union
whether the credit union is a cooperative association organized for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes.[2]

Subpart D

Proposed Subpart D would have 5 provisions:

Proposed § 708a.401 Definitions

This provision defines what NCUA would consider a “combination transaction” covered by the rule, a definition for a “credit union” and “non-credit union” and a definition for “Regional director.”

A “combination transaction” would mean “any transaction in which a credit union does one or more of the following: Merges or consolidates with any non-credit union; assumes liability to pay any deposits in, or similar liabilities of, any non-credit union; or transfers assets to any noncredit union in consideration of the assumption of liabilities for any portion of the member accounts in the insured credit union.”

NCUA intends the term “combination transaction’’ to differentiate Subpart D transactions from other types of transactions such as mergers between FICUs, mergers between FICUs and privately insured credit unions (PICUs), FICU conversions to banks, and FICU purchases of loans that are not part of a merger or consolidation

A “credit union” would have the same meaning as an insured credit union § 101 of the FCUA and would be defined by referencing the FCUA rather than incorporating the definition in its entirety in the proposed rule.[3]

“Non-credit union” would be defined as any financial institution that is not a Federal credit union or a State credit union, as those terms are defined in § 101 of the FCUA.[4]

The definition of “Regional director” includes NCUA RDs and the Director of ONES.

Proposed § 708a.402 Approval Required for Combination Transactions

This provision would require NCUA and state regulator prior approval for a combination transaction. The proposal does not specify the order in which those approvals must be obtained nor does it provide a timeframe within which NCUA approve or deny the transaction.

The proposed rule incorporates the FCUA provision listing 6 factors the NCUA must weigh when considering a request for approval for a combination transaction. The first 4 factors are related to safety and soundness:

the history, financial condition, and management policies of the credit union
the adequacy of the credit union’s reserves
the economic advisability of the transaction
the general character and fitness of the credit union’s management

The remaining 2 factors are not safety and soundness related:

the convenience and needs of the members to be served by the credit union
whether the credit union is a cooperative association organized for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes

NCUA explicitly notes the last 2 factors are not safety and soundness. In so noting, NCUA says it reserves the right to object to a transaction, or portions of a transaction, even absent safety and soundness concerns.

Paragraph (c) of the proposal would require FICUs hold a vote of their board of directors before the FICU submits its application package to NCUA and the state.

Proposed § 708a.403 Submission to the NCUA

This section addresses issues related to the FICU’s membership, permissible powers, and the duties of the FICU’s board.

A credit union seeking to acquire the assets and liabilities of bank or otherwise engage in a combination transaction must submit a request to its state regulator and NCUA Regional Director. The request to NCUA must:

explain the credit union’s plan for converting the bank customers to credit union members
include a balance sheet and income statement for each institution; a combined financial statement showing the transaction’s potential impact on the credit union’s net worth; a summary of the credit union’s due diligence process, and support for the transaction price
include a delinquent loan summary for any assets involved in the transaction; and an analysis of the adequacy of the credit union’s ALLL account
list any of the other institution’s assets that would be impermissible for the credit union to hold under the FCUA and/or state law and explain the plan to dispose of those impermissible assets in advance of the transaction
include a list of bank shareholders
include any other information the NCUA RD requests in his or her discretion

The credit union’s request for approval must also include a certification signed by each of the credit union’s directors that voted in favor of the combination transaction. The certification must include:

a statement that each director signing the certification supports the proposed transaction & believes it’s in the best interests of the current & potential members
a statement that credit union management has adequately explained the transaction’s expected effect on the credit union’s net worth and balance sheet, as well as how the purchase price was determined
a description of all materials submitted to NCUA with the certification
a statement that each director signing the certification had the opportunity to review all relevant facts about the transaction before voting on it
A statement that none of the director signing the certification has any financial or personal interest in the transaction

The proposal also suggests that additional requirements may be published in NCUA’s NSPM.

404 Insurance of Deposits

This provision deals with share insurance of the new members’ deposits. The proposal requires the FICU to demonstrate that any customer deposits it assumes will be insured by the NCUSIF as of the transaction close. NCUA notes that generally, FICUs do not have authority to hold non-insured deposits and that the FDIC will not approve a transaction unless the bank customers’ deposits transferred to the credit union will have immediate NCUSIF coverage.

Proposed § 708a.405 Federal Credit Union Membership

This provision applies only to FCUs. Under the proposal, FCUs must first demonstrate that depositors are within the FCU’s FOM and then explain how the depositor will become a member. NCUA’s long held position has generally required that to become a member of the FCU the other entity’s customer must affirmatively act through an authoritative vote in the affirmative by a majority of the bank customers (akin to a merger vote for credit unions) or individual consent before the closing of a combination transaction.

Section 741.8 Purchase of Assets and Assumption of Liabilities

In addition to creating a new Subpart D for combination transactions, the proposal makes changes to existing § 741.8. The proposed changes would:

Add “purchase of assets” other than loans to the list of authorized transactions for which FICUs must receive NCUA pre-approval (the current list is comprised of purchasing loans or assuming an assignment of deposits, shares, or liabilities from non a FICU)
Revises existing paragraph (c) to reference the other NCUA regulations that apply to each particular type of transaction:

For a merger or consolidation with the type of institution listed in § 741.8(a)(2) credit unions must comply with § 708a Subpart D
For a merger or consolidation with an institution of the type listed in § 741.8(a)(1), credit unions must comply with § 708b
For assumptions of deposits or other liabilities, not part of a merger or consolidation, from the type of institution listed in § 741.8(a)(2), credit unions must comply with Subpart D of part 708a
For purchases of loans, not part of a merger or consolidation, from the type of institution listed in § 741.8(a)(1) and (a)(2), credit unions must comply with § 701.23
For purchase of other assets, not part of a merger or consolidation, from the type of institution listed in § 741.8(a)(1) and (a)(2), credit unions must comply with § 703 or § 721

Adds a new paragraph (d) to enumerate the statutory factors NCUA must consider when evaluating transactions (the same 6 considerations noted above for combinations). NCUA would consider the 6 factors FOR ALL §741.8 transactions

-End-

[1] Part 741.208 reads in full:

Any credit union which is insured pursuant to title II of the Act and which merges with another credit union or non-credit union institution, and any state-chartered credit union which voluntarily terminates its status as a federally insured credit union, or converts from federal insurance to other insurance from a government or private source authorized to insure member accounts, shall adhere to the applicable requirements stated in section 206 of the Act and parts 708a and 708b of this chapter concerning mergers and voluntary termination or conversion of insured status.

[2] 12 U.S.C. 1785(c). As discussed below in this summary, these same 6 factors will now be applied to § 741.8 transactions as well.

[3] The definition in 12 U.S.C. 1752(7) reads as follows:

“The term “insured credit union” means any credit union the member accounts of which are insured in accordance with the provisions of subchapter II of this chapter, and the term “noninsured credit union” means any credit union the member accounts of which are not so insured;”

[4] The definitions in 12 U.S.C. 1752(1) and 1752(6) respectively are as follows:

“Federal credit union” means a cooperative association organized in accordance with the provisions of this chapter for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes; and The terms “State credit union” and “State chartered credit union” mean a credit union organized and operated according to the laws of any State, the District of Columbia, the several territories and possessions of the United States, the Panama Canal Zone, or the Commonwealth of Puerto Rico, which laws provide for the organization of credit unions similar in principle and objectives to Federal credit unions.

20-RA-01 Other Supervisory Committee Audits

January 2020

In September 2019, NCUA published a final rule making changes to the Supervisory Committee regulations in Part 715. In the final rule, NCUA is replacing the Supervisory Committee Guide with an Appendix to the rule, eliminating the “Balance Sheet Audit” and the “Report on Examination of Internal Controls Over Call Reporting”, and eliminating the 120-day deadline for third-party written audit reports to be delivered to the credit union.

The rule, which applies to FISCUs by way of reference in Part 741.202, took effect January 6, 2020.

NCUA’s Part 715 establishes share insurance audit requirements for FISCUs and general audit requirements for FCUs:

Type of charter	Asset size	Minimum audit required to fulfill supervisory committee audit responsibility	Part 715 section
FCU	$500 Million or more	Financial statement audit per GAAS by independent, State-licensed person	§715.5
	Less than $500 Million but greater than $10 Million	Either financial statement audit or other supervisory committee audit
	$10 Million or less	Supervisory committee audit.
FISCU	$500 Million or more	Financial statement audit per GAAS by independent, State licensed person	§715.6
	Less than $500 Million	Supervisory committee audit unless audit prescribed by State law is more stringent

For credit unions fulfilling Part 715 obligations with a Supervisory Committee Audit, new § 715.7 requires those audits to comply with the requirements of an Appendix to Part 715. The Appendix establishes the minimum procedures which must be performed for Other Supervisory Committee Audits, including:

Review of Board minutes for material changes to the credit union’s activities
Test and confirm asset and liability accounts such as: loans, cash on deposit, investments, shares, and borrowings
Test material equity, income and expense accounts;
Test for unrecorded liabilities;
- Review key internal controls including at a minimum: bank reconciliations procedures, cash controls, dormant account controls, wire and ACH transfer controls, loan approval and disbursement procedures, controls over accounts of employees and officials, other real estate owned, and foreclosed and repossessed assets
Test mathematical accuracy of the allowance for loan and lease loss account and ensure the methodology is properly applied;
Test loan delinquency and charge-offs.

To help credit unions comply with the Appendix requirements, NCUA has published an Other Supervisory Committee Audit Minimum Procedures Guide. The 26-page Guide expands on the Appendix to help credit unions meet audit requirements.

Summary: Proposed Rule re: Remittance Transfers Under the Electronic Fund Transfers Act (Regulation E)

12 CFR Part 1005

The Consumer Financial Protection Bureau (CFPB)

Prepared by the NASCUS Legislative & Regulatory Affairs Department

January 2020

The Consumer Financial Protection Bureau (CFPB) is proposing changes to the Remittance rule to mitigate the effects of the expiration of a statutory exception that allows insured institutions to disclose estimates instead of exact amounts to consumers. The exception is scheduled to expire on July 21, 2020.

In addition, the Bureau is proposing to increase a safe harbor threshold in the Rule related to whether a person makes remittance transfers in the normal course of its business, which would have the effect of reducing compliance costs for entities that make a limited number of remittance transfers annually.

Comments must be received by January 21, 2020. The proposed rule can be found here and the unofficial redline version of the proposed rule can be found here.

Summary

The Electronic Fund Transfer Act (EFTA), as amended by Dodd Frank, establishes certain protections for consumers sending international money transfers or remittance transfers. The Bureau’s remittance rule (Regulation E) implements these protections. The Bureau is proposing several amendments to the remittance rule.

First, the Bureau is proposing to increase a safe harbor threshold in the rule which would have the effect of reducing compliance costs for entities that make a limited number of remittance transfers annually. Currently, the rule provides a safe harbor that exempts “persons” from the rule requirements if the person provided 100 or fewer remittance transfers in the previous calendar year and provides 100 or fewer remittance transfers in the current calendar year. The Bureau is proposing to adjust the safe harbor threshold from 100 transfers to 500 transfers annually.

Second, the Bureau is proposing changes to the Rule to mitigate the effects of the expiration of a statutory exception that allows insured institutions to disclose estimates of the exchange rate and covered third party fees to customers instead of exact amounts. The exception is due to expire on July 21, 2020. The proposal would adopt a permanent exception that would permit insured institutions to estimate the exchange rate and third party fees for remittance transfers to certain countries under certain conditions.

Comments Requested

The Bureau is seeking comment on a number of items including (but not limited to):

Proposal to increase the normal course of business safe harbor threshold
Data or other evidence that would assist it in determining what number would be most appropriate for the safe harbor threshold
Whether its proposal to increase the safe harbor threshold would in fact help reduce burden for banks/credit unions that provide transfers only as an accommodation to their customers?
Whether any banks/credit unions exited the market or limited the number of remittance transfers provided as a result of compliance costs associated with the remittance rule? And, if so, whether they would reenter the market or lift the limits they placed on their remittance transfer services if the Bureau raised the safe harbor threshold as proposed?
Whether entities that would no longer be covered under the remittance rule would discontinue providing the disclosures, cancellation rights or error resolution protections that they are currently required to provide pursuant to the rule? If such entities would continue providing consumer protections for some or all of their remittance transfers, the Bureau seeks comment on what those protections would be.
Whether any additional clarification or guidance regarding the proposed revised safe harbor threshold is needed and, if so, what specifically should be addressed?
Whether and to what extent providers have encountered transitional issues when qualifying for the existing safe harbor after complying with the rule? Whether providers who expect to qualify for the proposed revised safe harbor anticipate any transitional issues?

Letters to Credit Unions 20-CU-01 NCUA Supervisory Priorities for 2020

January 2020

NCUA has published a Letter to Credit Unions (LTCU) identifying the agency’s supervisory priorities for 2020. The LTCU also updates stakeholders on NCUA’s efforts to modernize its examination and supervision program.

NCUA identified seven supervisory priorities for 2020. Six of the priorities are carried over from the 2019. The seven 2020 supervisory priorities are:

BSA/AML
Consumer Financial Protection
Credit Risk
Current Expected Credit Losses
Information Systems and Cyber Security
Liquidity
The End of LIBOR (new for 2020)

NCUA will continue to operate under the extended exam cycle. For FISCUs, this means an NCUA exam cycle of 8-12 months for FISCUs with:

Assets greater than $1 billion;
Composite NCUA CAMEL code 4 or 5 with assets greater than $50 million; or
Composite NCUA CAMEL code 3 with assets greater than $250 million.

All other FISCUs will be on a risk-based exam cycle (and at least once every 5 years). See LTCU 16-CU-12 for more information on NCUA’s risk-based exam program. Credit unions < $50 million will continue to be examined under the Small Credit Union Exam Program procedures.

NCUA’s 2020 Supervisory Priorities

Bank Secrecy Act Compliance/Anti-Money Laundering

NCUA requires its examiners review BSA/AML on every exam. NCUA, and states, have MOUs in place with FinCEN and BSA/AML continues to be a priority for policy makers in Washington, DC. Credit unions should be aware of the following joint statements issued by federal regulators in 2018 and 2019 on BSA related issues:

October 2018 statement on sharing BSA resources
December 2018 statement on using innovation to enhance BSA compliance
July 2019 statement on risk focused BSA supervision

Furthermore, in 2020, NCUA is emphasizing customer due diligence and beneficial ownership compliance requirements as well as the timely and accurate filing of SARs and CTRs. Additional developments for 2020:

Coming updates to the FFIEC BSA Exam Manual
Pending updates to enforcement guidelines and guidance on PEPs

NCUA has resources available: Bank Secrecy Act Resources . To enhance understanding of BSA/AML/OFAC examination and compliance obligations, NASCUS’ 2020 BSA Conference will be held November 9-12, 2020, in Ft. Lauderdale, Florida. NASCUS’ BSA Conference, presented jointly with CUNA, is the largest credit union specific BSA conference in the country.

Consumer Financial Protection

NCUA conducts risk-focused reviews of applicable consumer financial protection regulations during every NCUA examination. In addition, each year NCUA rotates consumer protection regulations to emphasize in examinations. In 2020, in addition to any risk-focused regulations identified for review, NCUA examiners will also focus on:

Electronic Fund Transfer Act (Regulation E).NCUA examiners will evaluate Electronic Fund Transfer (EFT) policies & procedures, review initial account disclosures, & review Reg. E’s error resolution procedures.
Fair Credit Reporting Act (FCRA).NCUA examiners will review credit reporting policies and procedures and the accuracy of reporting to credit bureaus.
Gramm-Leach-Bliley (GLBA).NCUA examiners will continue to assess compliance with GLBA and credit union protection of member non-public personal information.
Small dollar lending (including PAL Lending).NCUA examiners will test for compliance with NCUA PALs rules and interest rate cap and evaluate any non-PALs lending programs.
Truth in Lending Act (Regulation Z).NCUA examiners will evaluate credit union practices related to:
annual percentage rates and late charges and related siclosures
how loan payments are applied to principal
interest, fees and other charges, and late fees
whether the application is consistent with the agreement and disclosures
Military Lending Act (MLA) & Servicemembers Civil Relief Act (SCRA).NCUA will review credit union compliance with the MLA and SCRA.

Resources are available at NCUA’s Consumer Compliance resources webpage.

Credit Risk

In 2020, NCUA examiners will place emphasis on the review of the credit union’s loan underwriting standards and procedures. In particular, examiners will verify if credit unions properly analyzed borrowers’ ability to meet debt service requirements without undue reliance on the value of any collateral. NCUA will also be implementing enhanced examination procedures for credit unions with very high concentrations in specific loan types. For more information, see NCUA LTCU 10-CU-03, Concentration Risk.

Current Expected Credit Losses

FASB has delayed CELC until January 2023 for credit unions. However, NCUA examiners will continue to discuss CECL implementation plans with credit unions.

For more information, see the April 2019 Interagency FAQs.

Information Systems and Assurance (Cybersecurity)

An updated version of ACET will deployed in 2020. In early 2020, Credit unions will be able to access the system thru N NCUA’s website to complete self- assessments. From 2018 to the present, NCUA has conducted cybersecurity maturity assessments for credit unions with assets of $250 million or greater. In 2020, the NCUA will continue completing these assessments for credit unions with assets over $250 million and begin completing assessments for credit unions with assets over $100 million. The initial maturity assessment cycle will be completed in 2021. Starting in 2022, the agency will refresh the maturity assessments following the same cycle. NCUA will also be piloting new procedures in 2020 to evaluate critical security controls during examinations between maturity assessments.

For more information, visit the NCUA’s Cybersecurity Resources website.

LIBOR Cessation Planning

As NASCUS has be discussing with its members, the LIBOR index is ending in 2021. This has the potential to disrupt credit union involved LIBOR -based products and contracts such as loans, investments, derivatives, deposits, and borrowings. Credit unions should be proactively transitioning away from instruments using LIBOR as a reference rate. NCUA examiners will assess credit unions’ exposure and planning related to the discontinuance of LIBOR.

Liquidity Risk

Credit unions continue to exhibit lower levels of on-balance-sheet liquidity due, in part, to strong loan growth trends and increased competition for traditional, low-cost deposits. In 2020, NCUA examiners will review liquidity management & planning by evaluating:

effects of changing interest rates on the market value of assets & borrowing capacity;
Scenario analysis for liquidity risk modeling, including possible member share migrations and scenario analysis for changes in cash flow projections
The appropriateness of contingency funding plans

NCUA Exam Modernization

NCUA Connect – In 2019, the NCUA began piloting a new secure user portal, NCUA Connect. In 2020 NCUA Connect will be made available to all credit unions and state regulators.
MERIT – The Modern Examination and Risk Identification Tool (MERIT). MERIT will be released to all examination staff in the second half of 2020. Credit unions will be able to use MERIT to send files or updates to examiners and access examination reports.

For more information, see NCUA Connect & MERIT. In addition, NCUA has several other initiatives underway such as CUOnline (the Profile and Call Report). See Examination Modernization Initiatives.

Statutory and Regulatory Updates

There have been recent changes to laws and regulations applicable to credit unions.

Commercial Real Estate Appraisal Rule – Effective October 22, 2019, new final rule § 722 increased the appraisal threshold for commercial real estate transactions from $250,000 to $1 million. Now for commercial loans under $1 million credit unions may choose to conduct a written estimate of market value or obtain an appraisal by a state-licensed appraiser. The final rule increases the standards for thequalifications and independence of individuals conducting written estimates of market value.
Private Flood Insurance Rule – Under new private flood insurance rules credit unions must accept certain flood insurance policies from private providers. For other policies from private providers, credit unions have the option to accept the insurance if the policy meets certain criteria. For more information, see the NCUA Regulatory Alert, 19-RA-01, Flood Insurance Alternatives.
Public Unit and Nonmember Shares Rule – The NCUA approved a final rule amending Section 701.32 regarding public unit and nonmember shares. Effective January 29, 2020, federally insured credit unions generally can accept public unit and nonmember shares in an amount up to 50% of paid-in and unimpaired capital and surplus, less any public unit or nonmember shares, or $3 million, whichever is greater. If public unit and nonmember shares, combined with borrowings exceeds 70% then a written plan must be kept.
Serving Hemp Businesses – Credit unions may provide the customary range of financial services for business accounts, including loans, to lawfully operating hemp-related businesses within their FOM. The NCUA encourages credit unions to thoughtfully consider whether they are able to safely and properly serve hemp-related businesses. In 2020, NCUA examiners will be collecting data through the examination process concerning the types of services credit unions are providing to hemp-related businesses. See NCUA Regulatory Alert, 19-RA-02, Serving Hemp Businesses, and the USDA’s website.
Supervisory Committee Audits Rule – NCUA has amended § 715 to provide additional flexibility to FICUs regarding financial statement audits. These amendments go into effect January 6, 2020.The NCUA has issued a new guide to assist supervisory committees in conducting other supervisory committee audits.