Policy for Setting the Normal Operating Level NCUSIF

Request for Comment: Policy for Setting the Normal Operating Level NCUSIF

 Prepared by NASCUS Legislative & Regulatory Affairs Department
May 2021

In 2017, NCUA closed the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) and distributed its funds, property, and other assets and liabilities to the NCUSIF. At that time, NCUA also set the Normal Operating Level (NOL) of the NCUSIF at 1.39% and adopted a policy for setting the NOL.

NCUA is seeking public comments on whether changes should be made to the policy by which the National Credit Union Share Insurance Fund (NCUSIF) NOL is set.

Comments must be received on or before July 26, 2021. The Request for Comment may be read in its entirety here.

Summary

Statutory Background:

The FCUA directs NCUA to maintain an equity ratio for the NCUSIF not less than 1.2% and not more than 1.5%. The FCUA further directs the calendar year-end equity ratio to be used to determine whether the NCUA must make a distribution to FICUs. NCUA must, by statute, make a distribution to FICUs if:

  • The NCUSIF’s equity ratio exceeds the NOL.
  • The NCUSIF’s available assets ratio exceeds 1%.
  • Any loans to the Fund from the Federal Government, and any interest on those loans, have been repaid.

Setting the NOL:

NCUA’s policy for setting the NOL, established in 2017, is as follows:

  • Annually, NCUA reviews the NOL to determine if a change is warranted.
  • Any change in the NOL of more than 1 basis point will only be made after public notice and comment.
  • In conjunction with the public notice and comment, NCUA will issue a public report with data supporting the proposed change in the NOL.

In setting the NOL, NCUA seeks to achieve the following objectives:

  • Retain public confidence in federal share insurance.
  • Prevent impairment of the 1% contributed capital deposit.
  • Ensure the NCUSIF can withstand a moderate recession without the equity ratio declining below 1.2% over a 5-year period.

NCUA’s NOL Policy Model:

To implement its NOL policy, NCUA developed a calculation based on projections related to the following factors:

  1. The modeled performance of the NCUSIF over a 5-year period assuming a moderate recession. The model’s stress scenario estimates 3 primary drivers of outcomes:
    • insurance losses
    • insured share growth
    • yield on investments

The NCUA’s analysis is based on the FRB’s adverse economic scenario. However, since the FRB did not publish an adverse scenario in 2020 or 2021, the NCUA must use a scenario developed from the FRB’s baseline and severely adverse scenarios.

  1. The modeled potential decline in value of the NCUSIF’s claims on the corporate credit union asset management estates in a moderate recession.
  2. The projected decline in the equity ratio through the end of the following year without an economic downturn.

The economic conditions posed by the pandemic, including unprecedented share growth resulting in an NCUSIF equity ratio of 1.26% at year-end 2020, and the approaching wind-down of the NGN program and failed federal corporate credit union estates. have caused NCUA to reconsider the feasibility of using a moderate recession and a 5-year performance period as the basis for modeling stress on the NCUSIF. NCUA now seeks comments on the policy and approach for setting the NCUSIF Normal Operating Level.

In particular, the Board is interested in comments addressing the following questions:

  1. Should a moderate recession be the basis for evaluating the Insurance Fund performance during an economic downturn, or should the NCUA change the policy to consider a severe recession?
  2. What data source(s) should the NCUA use for determining the characteristics of a potential moderate or severe recession – the Federal Reserve scenario, an independent source, or the NCUA’s judgment?
  3. Should the NCUA continue modeling the performance of the NCUSIF over a 5-year period or a longer or shorter period?
  4. How should the NCUA utilize the modeled potential decline in value of the NCUSIF’s claims on the corporate asset management estates going forward until the estates are fully resolved?
  5. Should the NCUA continue to incorporate in the NOL analysis the projected equity ratio decline through the end of the following year without an economic downturn? Should this period be longer or shorter, or not factored into the analysis at all?
  6. Given forecasting uncertainties and timing challenges, would it be reasonable for the NCUA to change the requirement to request public comment only if the NOL were to change by a larger amount than just one basis point?
  7. Should the NOL be re-evaluated in the midst of an economic downturn or should it be left unchanged until the onset of an economic recovery?
  8. Should the NOL be re-evaluated on qualitative factors based on the COVID-19 pandemic?
  9. Is there any other information that NCUA should consider when setting the NOL?

 

Interim Final Rule Summary: Temporary Regulatory Relief in Response to COVID–19 — Prompt Corrective Action
Parts 702                  

Prepared by NASCUS Legislative & Regulatory Affairs Department
May 2021

NCUA issued an Interim Final Rule (IFR) to reenact 2 temporary changes made to part 702, Prompt Corrective Action (PCA) to provide regulatory relief to federally insured credit unions (FICUs) during the COVID–19 pandemic. The first change enables NCUA to issue orders applicable to all FICUs to waive the earnings retention requirement for any FICU that is classified as adequately capitalized. The second change modifies requirements for specific documentation required for net worth restoration plans (NWRPs) for FICUs that become undercapitalized.

These changes will be in place until March 31, 2022. This rule is substantially similar to an interim final rule that the Board published on May 28, 2020. (NASCUS’ comment letter in response to the 2020 IFR may be read here)

Comments must be received on or before June 18, 2021. The IFR may be read in its entirety here. The rule became effective on April 19, 2021.

Summary

In May 2020, NCUA issued an IFR that temporarily amended:

  • Part 702.201 earnings retention requirement for credit unions classified adequately capitalized; and
  • Part 702.206(c) Net Worth restoration Plans (NWRPs) for FICUs that become undercapitalized

In light of the economic dislocation resulting from the pandemic, and the rapid growth of deposits on many credit union balance sheets resulting from government stimulus and recovery efforts, NCUA determined that decreasing the earnings-retention requirements set forth in the NCUA’s regulations was necessary to avoid a significant redemption of shares in otherwise healthy credit unions. As a result, NCUA allowed any natural-person FICU that had a net worth classification, of adequately capitalized between March 31, 2020, and December 31, 2020, to decrease its earnings-retention requirement to zero.

The 2020 regulatory relief expired on December 31, 2020. Although the regulatory relief expired at year-end 2020, NCUA has continued to evaluate the economic impact of the pandemic and government-sponsored economic relief efforts.

In response to the enactment of the American Rescue Plan Act of 2021 that provides direct financial relief to individual taxpayers, NCUA anticipates that credit unions will once again receive a significant increase in deposits due to stimulus checks and believes it is appropriate to reinstitute the changes to the PCA provisions previously adopted in May 2020.

Reinstated Regulatory Relief

  • Part 702.201—Earnings-Retention Requirement for ‘‘Adequately Capitalized’’ FICUs

The purpose of existing § 702.201 is to restore a FICU that is less than well capitalized to a well-capitalized position in an incremental manner. Part 702.201 currently allows NCUA to waive the restoration requirement on a case-by-case basis upon submission of an application for waiver by a FICU and the FCUA provides NCUA authority to waive the requirement without an application or an individual order.

In light of the ongoing economic issues related to the pandemic, NCUA is re-enacting the change to the rule to provide for a blanket waiver of the earning retention requirement under PCA for adequately capitalized credit unions. The amendment also allows the NCUA Regional Director to require an application from a specific credit union should the situation so warrant.

This change will expire on March 31, 2022.

  • Section 702.206(c)—Net Worth Restoration Plans (NWRPs)

Pursuant to the FCUA, a FICU that is less than adequately capitalized must submit an NWRP to the NCUA. NCUA implements this provision through § 702.206. As discussed above, given the lingering economic issues related to the pandemic, NCUA has determined that it is appropriate to waive the NWRP content requirements for FICUs that become classified as undercapitalized predominantly as a result of share growth.

With this change, a FICU may submit a significantly simpler NWRP to the NCUA Regional Director attesting that its reduction in capital was caused by share growth and that such share growth is a temporary condition due to the combination of the pandemic and federal stimulus payments to taxpayers. (FISCUs must comply with applicable state requirements when submitting NWRPs for SSA approval.)

When reviewing an NWRP submitted pursuant to this provision, the NCUA RD will determine if the decrease in the net worth ratio was predominantly a result of share growth by analyzing the numerator and denominator of the net worth ratio:

  • No change, or an increase in the numerator and an increase in the denominator, would indicate that the decrease in the net worth ratio was due to share growth.

However, if there is an increase in the denominator and a decrease in the numerator, the NCUA RD will analyze whether the decrease in the numerator would have caused the credit union to fall to a lower net worth classification if there were no change in the denominator.

  • If so, the credit union’s net worth decline would not be predominantly due to share growth and the credit union would not be eligible to submit a streamlined NWRP.

NCUA notes that based on December 31, 2020, Call Report data, 48 credit unions would require an NWRP to be in place or be submitted for approval based on their PCA classification (up 30% from the 37 credit unions as of December 31, 2019).

The amendments made by the interim final rule will automatically expire on March 31, 2022 and are limited in number and scope.

 

Letter to Credit Unions 21-CU-03 LIBOR Transition
May 2021

NCUA issued LTCU 21-CU-03 to discuss issues related to the cessation of the publication of the London Inter-bank Offered Rate (LIBOR) and provide credit unions with the related Supervisory Letter 21-01 “Evaluating LIBOR Transition Plans” that NCUA issued to its examiners.

NCUA’s guidance follows guidance issued in November 2020 by the federal bank agencies, the FFIEC’s July 1, 2020, Joint Statement on Managing the LIBOR Transition, and the March 5, 2021, announcement by the LIBOR administrator announced that it cease publication of the one-week and two-month LIBOR settings immediately following publication of the December 31, 2021, LIBOR. The remaining LIBOR benchmarks will cease publication after the LIBOR publication on June 30, 2023.

NCUA cautions credit unions that the fact of certain LIBOR rates publishing until June 30, 2023, is not an opportunity to continue using LIBOR (i.e. entering into new contracts with terms beyond December 31, 2021) even though it might allow those contracts to mature naturally along with existing contracts with terms ending before December 31, 2022.

The NCUA encourages all federally insured credit unions to transition away from using the U.S. dollar LIBOR settings as soon as possible, but no later than December 31, 2021.

Summary of NCUA’s Supervisory Letter 21-01 “Evaluating LIBOR Transition Plans”

While the guidance officially only applies to NCUA examiners, NCUA has shared it with states as well and many states will likely adopt similar guidance (indeed several states had already issued guidance on LIBOR well before NCUA’s new guidance).

I. Background

NCUA provides examiners background on the LIBOR, characterizing it as is a widely used short-term interest rate benchmark referenced in derivative, bond, and loan contracts, including a range of consumer lending instruments such as mortgages and student loans. Current USD LIBOR settings include overnight, 1 week, & 1, 2, 3, 6, & 12-month rates. Then the following occurred:

  • July 2017 – actions by European regulators (for deep background click here) set in motion developments leading to the announced end of LIBOR publication.
  • July 2020 – FFIEC Joint Statement on Managing the LIBOR Transition highlighted the risks resulting from the transition away from LIBOR. NCUA & other bank regulators advise institutions to avoid using LIBOR no later than 12/31/ 2021.
  • November 2020 – A clearer transition path away from LIBOR develops when it is announced some LIBOR rates might be published beyond 12/31/2021.
  • March 5, 2021 – Announcement that 1-week and 2-month USD LIBOR will cease publication after 12/31/2021. The remaining USD LIBOR settings will cease after June 30, 2023, allowing existing transactions indexed to the more widely-used LIBOR settings to mature naturally.

NCUA believes that given consumer protection, litigation, and reputation risks, entering new contracts using LIBOR as a reference rate after December 31, 2021, would create safety and soundness, and compliance risks. FICUs should not be entering new contracts that use LIBOR as a reference rate unless they have robust fallback language that includes a clearly defined alternative reference rate, specific triggers, a spread adjustment, and some description of the conforming changes that are necessary.

II. Potential LIBOR Exposure

Credit unions may have LIBOR exposure in a variety of products & transactions, including derivatives, business loans, consumer loans, variable rate notes, securitizations (such as mortgage-backed securities), FHLB borrowings, and other products that have variable interest rates.

NCUA notes examiners should consider potential LIBOR exposure in the following products/portfolios and review for material LIBOR related risk:

  • Real Estate Loans
    The adjustable-rate mortgage (ARM) is traditionally the most common product incorporating LIBOR as a benchmark.  Credit unions could originate an ARM using loan underwriting standards established by a GSE such as Fannie or Freddie which also provide fallback language if LIBOR is no longer available. ARM mortgages that conform to GSE underwriting standards that credit unions originate represent low LIBOR risk.For non-conforming or customized ARMs that a credit union has originated and held in its portfolio, NCUA instructs its examiners to determine if an ARM has robust fallback language in the event the variable rate index is no longer available.
  • Other Loans
    Student loans also make up a significant portion of LIBOR-indexed loans owned by credit unions. NCUA notes that the potential for a high number of individual student loan accounts, combined with the likelihood of frequent borrower address/employment changes, may complicate credit union efforts to communicate rate changes to borrowers. For credit unions holding significant numbers of LIBOR-indexed student loan accounts, NCUA instructs examiners to consider:

    • reviewing the credit union’s transition plan
    • checking for fallback language
    • determining if the credit union has dedicated sufficient resources to modify LIBOR-indexed student loan accounts

Credit unions will typically have limited LIBOR exposure in commercial loan portfolios. A commercial loan may be part of a syndicated loan—typically, a variable rate instrument that references LIBOR as the variable rate index. Variable-rate commercial loans originated by a credit union are generally indexed to the Prime rate.

Auto loans typically use a fixed interest rate due to the relatively short-term maturity of the loans.

Credit card loans are revolving lines of credit with no fixed maturity date and are typically variable in rate using the Prime rate as a base index, plus an added spread to account for credit risk.

  • Investments
    Legacy LIBOR-indexed securities remain a significant percentage of variable rate assets held by credit unions. Fortunately, LIBOR-indexed investments typically have bond trustees that represent investors who are responsible for implementing robust fallback language to a new reference rate or rates in the transition away from LIBOR, which allows examiners to review such holdings with a low level of concern.
  • Borrowings
    As of September 27, 2019, the FHFA directed the FHLBank System to stop entering into LIBOR-based transactions involving advances with terms that mature after 12/31/2021. In July 2020, FHLB member banks were asked members to specifically identify LIBOR-indexed loans that are listed as collateral.NCUA instructs examiners to consider evaluating if the amount of LIBOR-indexed real estate loans pledged as collateral to an FHLB are material given the state of readiness of the credit union’s transition planning. Examiners can get the additional information and transition updates from the credit union’s FHLB member website.
  • Shares
    NCUA expects examiners to understand the credit union’s rate-setting methodology and to determine whether any repricing indexes are LIBOR-based. NCUA notes that most dividend rates paid on share accounts (e.g., money market, regular shares, & share drafts) are set by the credit union’s board rather than contractually tied to LIBOR.
  • Derivatives
    Interest rate derivatives are generally the largest transaction exposure to LIBOR risk for financial institutions, however this exposure is significantly smaller in credit unions. Interest rate swaps are the most common type of derivative that references USD LIBOR. Interest rate swaps involve the exchange of a fixed interest rate for a variable rate, or vice versa, and where the variable rate in the swap is often LIBOR. Derivative transactions are governed under an International Swaps and Derivatives Association (ISDA) agreement. In 2020, ISDA launched its Fallbacks Supplement and Fallbacks Protocol which amend ISDA’s standard definition for interest rate derivatives to incorporate robust fallbacks for derivatives linked to a key interbank offered rate. These changes became effective January 25, 2021. Centrally cleared swaps can be considered low risk, as can bi-lateral swaps for which counterparties have signed the ISDA protocol.

III. LIBOR Replacement Alternatives

NCUA does not endorse a specific replacement rate for USD LIBOR and the choice of reference rate is a business decision left to the credit union to determine what is appropriate (other than continuing to use LIBOR).

NCUA reiterates: All LIBOR-based contracts that mature after December 31, 2021 (one-week and two-month) and June 30, 2023 (one-, three-, six- and twelve-month) should include contractual language that provides for use of a robust fallback rate.

  • Secured Overnight Financing Rate
    While NCUA does not endorse a specific replacement index, the guidance does provide credit unions information on the alternative rate recommended by the Alternative Reference Rates Committee (ARRC). The ARRC was a joint FRB, CFTC, Treasury and Office of Financial Research initiative to identify an alternative to LIBOR. In June 2017, the ARRC selected the Secured Overnight Financing Rate (SOFR) as its recommended alternative to the USD LIBOR. The SOFR is based on transactions in the Treasury repurchase market, where banks and investors borrow or loan Treasuries overnight. As a result, SOFR is a secured rate and does not have a credit risk element.NCUA also discusses the fact that some existing contracts either do not address what happens in the absence of LIBOR or have provisions that could dramatically alter the economics of contract terms if LIBOR is discontinued. NCUA notes that there may be some contracts for which amending to address the discontinuance of LIBOR would be difficult or impossible. For contracts governed by NY law (as many financial contracts are) new legislation enacted in April addresses legacy contracts that mature after June 2023 and do not have effective fallbacks by:
    • Prohibiting a party from refusing to perform its contractual obligations or declaring a breach of contract as a result of the discontinuance of LIBOR or the use of the statute’s recommended benchmark replacement;
    • Definitively establishing that the recommended benchmark replacement is a commercially reasonable substitute for and a commercially substantial equivalent to LIBOR; and
    • Providing a safe harbor from litigation for the use of the recommended benchmark replacement.

IV. Examination Considerations

NCUA is instructing its examiners to review credit union planning for the transition away from LIBOR through narrowly focused reviews tailored to the size and complexity of a credit union’s LIBOR exposures. The following criteria will be used to determine if a credit union’s LIBOR risk is minimal:

  1. Credit union is prepared to stop originating or engaging in any LIBOR-related transactions as soon as possible, but not later than December 31, 2021.
  2. Credit union has minimal exposure to one-week or two-month LIBOR-indexed transactions that mature after December 31, 2021 (either by the total number or dollar balance) that do not have robust fallback language.
  3. Credit union has minimal exposure to 1, 3, 6, & 12 – month LIBOR-indexed transactions that mature after June 30, 2023 (either by the total number or dollar balance) that do not have robust fallback language.

The following are 6 risk areas examiners will use as a guide:

 1) Transition Planning – Instructs examiners that credit unions should be transitioning away from LIBOR by end of 2021 and that transition plans should be commensurate with the LIBOR exposure. Credit unions that have complex products or multiple product lines tied to LIBOR should maintain detailed plans and a project roadmap that defines transition timelines and milestones.

 2) Financial Exposure Measurement and Risk Assessment – FICUs with financial exposure to LIBOR should accurately measure and report their exposure to senior management, and the board including details on products, contracts, balances and transition costs.

 3) Operational Preparedness and Risk Control – Credit unions need to identify any internal and vendor-provided systems and models that use or require LIBOR and establish contingency plans in case a TSP cannot transition away from LIBOR.

 4) Contract Preparedness – FICUs should identify any contracts that reference LIBOR and not execute new contracts without fallback language. Transition plans should address how management will determine the impact of the end of LIBOR on existing contracts and the steps to be taken to make any needed modifications.

 5) Communication – FICUs should communicate the implications of the LIBOR transition on impacted financial products to their counterparties and members and mind compliance with any applicable laws and regulations such as Truth in Lending Act. For more information, see NCUA’s Federal Consumer Financial Protection Guide.

 6) Oversight – A credit union should provide its transition plan to the personnel necessary to implement the transition and provide regular status updates to senior management and the board.

Examiners have been instructed to document their LIBOR exposure findings in the revised LIBOR Alternative Readiness Workbook and to communicate any findings and recommendations to the credit union’s board and management through the ROE.

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CFPB Summary: Request for Information/Comment on Financial Institutions’ Use of Artificial Intelligence/Machine Learning
Docket No. CFPB-2021-0004

Prepared by the Legislative & Regulatory Affairs Division
April 2021

The OCC, Federal Reserve Board, FDIC, NCUA and CFPB (collectively, “the agencies”) issued a Request for Information (RFI)/Comments on financial institutions’ use of artificial intelligence (AI), including machine learning (ML).  The purpose of the RFI is to understand respondents’ views on the use of AI by financial institutions in their provision of services to customers and for other business or operational purposes; appropriate governance; risk management and controls over AI; and any challenges in developing, adopting, and managing AI.  The RFI also solicits respondents’ views on the use of AI in financial services to assist in determining whether any clarifications from the agencies would be helpful for financial institutions’ use of AI in a safe and sound manner and in compliance with applicable laws/regulations, including those related to consumer protection.

Comments are due by July 1, 2021.  The proposed rule can be access here.

Summary:

The agencies support responsible innovation by financial institutions that include the identification and management of risks associated with the use of new technologies and techniques.  With appropriate governance, risk management, and compliance management, financial institutions’ use of innovative technologies/techniques such as those involving AI, has the potential to augment business decision-making, and enhance services available to consumers and businesses.  The appendix of this RFI includes a non-comprehensive list of laws, regulations, and other agency issuances that may be relevant to the use of AI approaches by agency-supervised institutions.  Uses of AI by financial institutions include (but are not limited to):

  • Flagging Unusual Transactions: This involves employing AI to identify potential suspicious, anomalous or outlier transactions (fraud detection and financial crime monitoring)
  • Personalization of Customer Services: AI technologies, such as voice recognition and natural language processing (NLP), are used to improve customer experience and to gain efficiencies in the allocation of financial institution resources.
  • Credit Decisions: This involves the use of AI to inform credit decisions in order to enhance or supplement existing techniques.
  • Risk Management: AI may be used to augment risk management and control practices. For example, the AI approach might be used as a check on a more traditional credit model.  Financial institutions may use AI to enhance credit monitoring, payment collections, loan restructuring and recovery, etc.
  • Textual Analysis: This refers to the use of NLP for handling unstructured data (generally text) and obtaining insights from that data or improving the efficiency of existing processes.
  • Cybersecurity: AI may be used to detect threats and malicious activity, reveal attackers, identify compromised systems and support threat mitigation.

Potential Benefits of AI

The Bureau recognizes the potential benefits of AI such as:

  • Improved efficiency
  • Enhanced performance and cost reduction
  • Identification of relationships among variables that are not intuitive
  • Facilitates processing of large/detailed data sets
  • More accurate, lower-cost, and faster underwriting
  • Expanded credit access for consumers/small businesses

Potential Risks of AI

The Bureau notes the importance of financial institutions having processes in place to identify and manage potential risks associated with AI such as:

  • Operational vulnerabilities such as internal process/control breakdowns, cyber threats, information technology lapses, risks associated with the use of third parties, and model risks
  • Heightened consumer protection risks such as possible UDAAP/UDAP violations or privacy concerns.
  • AI may present particular risk management challenges to financial institutions in the areas of explainability, data usage and dynamic updating.

Explainability

  • This refers to how an AI approach uses inputs to produce outputs. Lack of explainability can prohibit financial institution management’s understanding of the conceptual soundness of an AI approach. Lack of explainability can also inhibit independent review and audit and make compliance with laws and regulations, including consumer protection requirements, more challenging.

Broader or More Intensive Data Usage

  • Data plays an important role in AI. Due to the fact that an AI algorithm is dependent upon the training data, an AI system generally reflects any limitations of that dataset.  As a result, AI may perpetuate or even amplify bias or inaccuracies inherent in the training data or make incorrect predictions if the data set is incomplete or non-representative.

Dynamic Updating

  • Some AI approaches have the capacity to update on their own, sometimes without human interaction, often known as “dynamic updating.” Monitoring and tracking an AI approach that evolves on its own can present challenges in review and validation.

Request for Comments:

In this RFI, the agencies are seeking information on financial institutions’ risk management practices related to AI; barriers or challenges facing financial institutions when developing, adopting and managing AI and its risks; and benefits to financial institutions and their customers from the use of AI.  The RFI also solicits respondents’ views on the use of AI in financial services which will help the agencies determine whether any clarification would be helpful for financial institutions’ use of AI in a safe and sound manner and in compliance with applicable laws and regulations, including those related to consumer protection.

The agencies are also asking particular questions regarding the following:

Explainability:

To address the lack of explainability of certain AI approaches, researchers have developed techniques to help explain predictions or categorizations. These techniques are often referred to as “post-hoc” methods, because they are used to interpret the outputs rather than the design.

Related Questions

  • How do financial institutions identify and manage risks relating to AI explainability? What barriers or challenges for explainability exist for developing, adopting, and managing AI?
  • How do financial institutions use post-hoc methods to assist in evaluating conceptual soundness? How common are these methods? Are there limitations of these methods (whether to explain an AI approach’s overall operation or to explain a specific prediction or categorization)? If so, please provide details on such limitations.
  • For which uses of AI is lack of explainability more of a challenge? Please describe those challenges in detail. How do financial institutions account for and manage the varied challenges and risks posed by different uses?

Risks from Broader or More Intensive Data Processing and Usage:

Like other systems, AI is designed to interact directly with training data to identify correlations and patterns and use that information for prediction or categorization.  This means that data quality is important for AI.  If the training data are biased or incomplete, AI may incorporate those shortcomings into its predictions or categorizations.  The importance of practices such as data quality assessments to determine the relevance and suitability of data used in a model, may be heightened in the use of AI.

Related Questions:

  • How do financial institutions using AI manage risks related to data quality and data processing? How, if at all, have control processes or automated data quality routines changed to address the data quality needs of AI? How does risk management for alternative data compare to that of traditional data? Are there any barriers or challenges that data quality and data processing pose for developing, adopting, and managing AI? If so, please provide details on those barriers or challenges.
  • Are there specific uses of AI for which alternative data are particularly effective?

Overfitting:

Overfitting can occur when an algorithm “learns” from idiosyncratic patterns in the training data that are not representative of the population as a whole.  Overfitting is not unique to AI, but it can be more pronounced in AI than with traditional models.  Undetected overfitting could result in incorrect predictions or categorizations.

Related Questions:

  • How do financial institutions manage AI risks relating to overfitting? What barriers or challenges, if any, does overfitting pose for developing, adopting, and managing AI? How do financial institutions develop their AI so that it will adapt to new and potentially different populations (outside of the test and training data)?

Cybersecurity Risk:

Like other data-intensive technologies, AI may be exposed to risk, from a variety of criminal cybersecurity threats.  For example, AI can be vulnerable to “data poisoning attacks,” which attempt to corrupt and contaminate training data to compromise the system’s performance.

Related Questions:

  • Have financial institutions identified particular cybersecurity risks or experienced such incidents with respect to AI? If so, what practices are financial institutions using to manage cybersecurity risks related to AI? Please describe any barriers or challenges to the use of AI associated with cybersecurity risks. Are there specific information security or cybersecurity controls that can be applied to AI?

Dynamic Updating:

A particular characteristic of some AI is the ability for it to learn or evolve over time, especially as it captures new training data.  This can present challenges for validating, monitoring, tracking and documenting the AI approach.

Related Questions:

  • How do financial institutions manage AI risks relating to dynamic updating? Describe any barriers or challenges that may impede the use of AI that involve dynamic updating. How do financial institutions gain an understanding of whether AI approaches producing different outputs over time based on the same inputs are operating as intended?

AI Use by Community Institutions:

A financial institution’s AI strategy, use of AI, and associated risk management practices could vary substantially based on the financial institution’s size, complexity of operations, business model, staffing and risk profile, and this could affect the corresponding risks that arise.  Community institutions may be more likely to use third-party AI approaches or rely on third party services that use AI.  This may pose different challenges in a financial institution’s adoption of AI.

Related Questions:

  • Do community institutions face particular challenges in developing, adopting, and using AI? If so, please provide detail about such challenges. What practices are employed to address those impediments or challenges?

Oversight of Third Parties:

Financial institutions may opt to use AI developed by third parties, rather than developed internally.  Existing agency guidance describes information/risks that may be relevant to financial institutions when selecting third party approaches and sets out principles for the validation of such third-party approaches.

Related Questions:

  • Please describe any particular challenges or impediments financial institutions face in using AI developed or provided by third parties and a description of how financial institutions manage the associated risks. Please provide detail on any challenges or impediments.  How do those challenges or impediments vary by financial institution size and complexity?

Fair Lending:

Depending on the specific use, there may be uncertainty about how less transparent and explainable AI approaches align with applicable consumer protection legal and regulatory frameworks, which often address fairness and transparency.

Related Questions:

  • What techniques are available to facilitate or evaluate the compliance of AI-based credit determination approaches with fair lending laws or mitigate risks of noncompliance? Please explain these techniques and their objectives, limitations of those techniques, and how those techniques relate to fair lending legal requirements?
  • What are the risks that AI can be biased and/or result in discrimination on prohibited bases? Are there effective ways to reduce risk of discrimination, whether during development, validation, revision and/or use? What are some of the barriers to or limitations of those methods?
  • As part of their compliance management systems, financial institutions may conduct fair lending risk assessments by using models designed to evaluate fair lending risks. What challenges, if any, do financial institutions face when applying internal model risk management principles and practices to development, validation, or use of fair lending risk assessment models based on AI?
  • The Equal Credit Opportunity Act (ECOA), which is implemented by Regulation B, requires creditors to notify an applicant of the principal reasons for taking adverse action for credit or to provide an applicant a disclosure of the right to request those reasons. What approaches can be used to identity the reasons for taking adverse action on a credit application, when AI is employed? Does Regulation B provide sufficient clarity for the statement of reasons for adverse action when AI is used? If not, please describe in detail any opportunities for clarity.

Additional Considerations:

  • To the extent not already discussed, please identity any additional uses of AI by financial institutions and any risk management challenges or other factors that may impede adoption and use of AI.
  • To the extent not already discussed, please identify any benefits or risks to financial institutions’ customers or prospective customers from the use of AI by those financial institutions. Please provide any suggestions on how to maximize benefits or address any identified risks.

 

 

 

Interim Final Rule Summary Asset Thresholds
(Parts 700, 702, 708a, 708b, & 790)

Prepared by NASCUS Legislative & Regulatory Affairs Department

March 2021

To help credit unions manage the accelerated balance sheet growth resulting from various governmental monetary actions in response to the COVID-19 pandemic, NCUA is issuing an Interim Final Rule (IFR) allowing federally insured credit unions (FICUs) to use their March 31, 2020 asset data to determine the applicability of certain regulatory asset thresholds during calendar years 2021 and 2022.

Specifically, the IFR allows use of March 31, 2020, financial data when determining:

  1. Whether the FICU is subject to supervision by NCUA’s Office of National Examinations and Supervision (ONES) ; and if the FICU is subject to ONES
  2. Which of three capital planning and stress testing tiers the FICU is subject to

NCUA also reserves the authority to classify a FICU as subject to ONES supervision and assign that credit union to a Tier commensurate with the credit union’s risk profile.

The Interim Final Rule may be read here. Comments are due to May 24, 2021.

 The rule applies to both FISCUs and FCUs and becomes effective upon publication in the Federal Register.

Summary

At the start of the pandemic, consumer spending decreased as individual states & major metropolitan areas ordered millions of Americans to stay home. Meanwhile, market volatility created a flight to safety which pushed money from the markets to safer assets, including deposits in credit unions. NCUA notes that fiscal stimulus applied additional upward pressure on FICU balance sheets. In fact, the balance sheet of FICUs just below $10 billion in assets have swelled by an average of about 14% in contrast to 2019 when they average asset growth of just 9%.

As a result of the pandemic related balance sheet growth, some larger FICUs are approaching the regulatory asset thresholds that trigger supervision by NCUA’s Office of National Examinations and Supervision (ONES) and additional regulatory compliance obligations.

Because complying with the more stringent regulatory standards applicable to FICUs with assets of $10 billion and greater would impose additional transition and compliance costs on some FICUs that would not be subject those standards “but for” the consequences of the pandemic, NCUA has determined to provide affected FICUs more time to either reduce their balance sheets, or to prepare for higher regulatory standards.

  • Capital Planning & Stress Testing Thresholds

Pursuant to § 702, FICUS over $10 billion in assets are subject to three tiers of stress testing:

    • Tier I      –   $10b assets – $15b assets   –  Capital Plan
    • Tier II     –   $15b assets – $20b assets  –  Capital Plan & Stress Testing
    • Tier III    –   $20b+ assets    –   Capital Plan submitted to NCUA & Stress Testing

The asset thresholds for each tier is based on a FICU’s asset size on March 31 each year and if a FICU crosses any of the tier I, II, or III asset thresholds at that time, then the FICU’s new classification is effective on January 1 of the next year. Therefore, a FICU’s capital planning and stress requirements for this year were determined by its assets as of March 31, 2020 and were effective January 1, 2021.

Under the IFR, a FICUs Tier for 2022 will be determined by its March 31, 2020 assets. This means that asset growth in 2020 will not trigger new regulatory requirements under Part 702 until January 1, 2023, at the earliest.

  • Oversight by ONES

Currently, ONES oversees FICUs with $10 billion or more in assets as of March 31 of the previous year. Under the interim final rule, the NCUA will use financial data as of March 31, 2020, instead of March 31, 2021, to determine the supervision of natural person credit unions for calendar year 2022.

  • Reservation of Authority

NCUA notes that there may be circumstances when deferring a FICUs supervision by ONES, or its ascension to a higher Tier would be inappropriate. In such cases, NCUA reserves its existing authority pursuant to § 702 to designate a FICU as subject to ONES supervision or a tier I, II, or III credit union. When making any such determination, the Board would consider all relevant factors affecting the FICU’s safety and soundness, including, but not limited to:

  • The extent of asset growth of the FICU since March 31, 2020
  • The causes of such growth, including whether growth occurred as a result of mergers or purchase and assumption transactions; whether such growth is likely to be temporary or permanent
  • Whether the FICU has become involved in any additional activities since March 31, 2020, and, if so, the risk of such activities
  • The type of assets held by the FICU

In the IFR, NCUA emphasizes that the agency will consider whether the FICU crossed a threshold due to a merger or purchase and assumption transaction that significantly increases the FICU’s asset size as opposed to growth resulting from monetary policy response to the pandemic. FICUs crossing a regulatory threshold because of a merger or purchase and assumption transaction have the opportunity to plan and prepare for the change in regulatory requirements.

Final Rule Summary: Joint Ownership Share Accounts (Part 745)

Prepared by NASCUS Legislative & Regulatory Affairs Department

March 2021

NCUA has issued a final rule amending its rules regarding what documentation the National Credit Union Share Insurance Fund (NCUSIF) may rely on to evidence joint ownership of a share account for separate share insurance coverage. The final rule amends § 745.8 to provide an alternative method to satisfy the membership card or account signature card requirement necessary for insurance coverage in the event the jointly signed membership cards cannot be produced by the credit union.

This rule applies to federally insured state credit unions (FISCUs) by reference in  § 741.212.

The change mirrors one made in 2019 by FDIC for banks.

The provisions of this rule become effective March 26, 2021. The rule may be read in its entirety here.

 Summary

As the Administrator of the NCUSIF, NCUA is authorized to promulgate regulations governing the payment of coverage to members in the event of the failure of a federally insured credit union (FICU). NCUA recognizes categories of accounts, and each category is eligible for the maximum share insurance coverage allowable by law.

Section 745.8 of the NCUA’s Rules & Regulations governs share insurance coverage for joint ownership accounts and provides that ‘‘qualifying joint accounts’’ will be insured separately from the joint co-owners’ individual accounts (if any). In general, “qualifying joint accounts’’ must satisfy two requirements:

  • Each co-owner has personally signed a membership card or account signature card; and
  • Each co-owner possesses withdrawal rights on the same basis.

The final rule amends § 745.8 to allow a FICU to use information contained in its account records to satisfy the signature card requirement proving joint ownership when the signature card or membership cards cannot be located. Examples of information that could prove co-ownership of the account include:

  • Evidence that the FICU issued the means for accessing the account to each co-owner; or
  • Evidence of usage of the share account by each co-owner.

Part 745.8(c) is amended to read as follows:

  • 745.8 Joint ownership accounts * * * * *

(c) Qualifying joint accounts.

(1) A joint account is a qualifying joint account if each of the co-owners has personally signed a membership or account signature card and has a right of withdrawal on the same basis as the other co-owners. The signature requirement does not apply to share certificates, or to any accounts maintained by an agent, nominee, guardian, custodian or conservator on behalf of two or more persons if the records of the credit union properly reflect that the account is so maintained.

(2) The signature card requirement of paragraph (c)(1) of this section also may be satisfied by information contained in the account records of the federally insured credit union establishing coownership of the share account, including, but not limited to, evidence that the institution has issued a mechanism for accessing the account to each co-owner or evidence of usage of the share account by each co-owner.

 

 

-End-

Final Rule Summary: Corporate Credit Unions (Part 704)                     

Prepared by NASCUS Legislative & Regulatory Affairs Department

March 2021

NCUA has issued a final rule to cohere the agency’s Part 704, Corporate Credit Unions with the 2020 final Subordinated Debt rule. Part 704 applies to state-chartered corporate credit unions by reference in § 741.206.

The final rule:

  • Makes clear corporate credit unions may purchase natural person credit union subordinated debt
  • Incorporates the definition of subordinated debt from the 2020 final rule into Part 704
  • Requires corporate credit unions deduct from their Tier I capital calculation the amounts of any natural person subordinated debt in which they are invested

The provisions of this rule become effective January 1, 2022. The rule may be read in its entirety here.

 Summary

NCUA’s final Subordinated Debt rule permits low-income designated credit unions, complex credit unions, and new credit unions to issue subordinated debt instruments for purposes of regulatory capital treatment. This final corporate credit union rule will govern how corporate credit unions invest in those instruments issued by natural person credit unions (NPCUs).

  • What is NPCU Subordinated Debt?

NCUA’s Subordinated Debt rule defines NPCU subordinated debt as any debt instrument issued by a natural person credit union that is subordinate to all other claims against the credit union, including the claims of creditors, shareholders, and either the NCUSIF or the insurer of a privately insured credit union.

This definition is now incorporated into the definitions of § 704.2.

  • May corporate credit unions purchase NPCU subordinated debt?

Yes. A corporate credit union’s ability to purchase NPCU subordinated debt is inherit in the corporate credit union’s lending authority because NCUA has characterized the issuance of subordinated debt as a borrowing for the NPCU. Because corporate credit unions’ current lending authority is sufficiently broad to include purchasing subordinated debt instruments NCUA is not making any changes to the regulatory text of § 704.

  • What is the affect on a corporate credit union’s regulatory capital of purchasing NPCU subordinated debt?

Part 704 currently requires corporate credit unions to deduct from Tier 1 capital any investments in perpetual contributed capital and nonperpetual capital accounts that are maintained at other corporate credit unions. The final rule will treat NPCU subordinated debt in the same manner. To guard against systemic risk and the potential for cascading losses, NPCU subordinated debt purchased by a corporate credit union will be fully deducted from the corporate credit union’s Tier I capital.

Summary: NCUA 2021 Regulatory Review

Prepared by NASCUS Legislative & Regulatory Affairs Department
February 2021

The NCUA maintains a rolling review schedule that identifies 1/3 of the agency’s existing regulations for review each year and provides stakeholders an opportunity to comment.  NCUA’s Regulatory Review is a not an exclusive list of NCUA rulemaking this year, the agency will also engage in discretionary rulemaking involving any provision it believes necessary.

NCUA’s 2021 Regulatory Review may be read here.

Comments on NCUA’s 2021 regulatory review are due to NCUA by August 16, 2021. NASCUS will file comments on the Regulatory Review. To discuss the 2021 NCUA Regulatory Review, please contact NASCUS at your convenience.

This year, NCUA will review the following 12 rules as part of the agency’s review:

  • 748 Security Program, Report of Suspected Crimes, Suspicious Transactions, Catastrophic Acts and Bank Secrecy Act Compliance

Part 748 applies to FISCUs by way of reference in Part 741.214. The rule mandates compliance with the BSA, the creation of a written security program, and the creation of a program to safeguard member information.

  • 749 Records Preservation Program and Appendices – Record Retention Guidelines; Catastrophic Act Preparedness Guidelines

Part 749 applies to FISCUs by way of reference in Part 741.215. NCUA’s record retention rule requires all federally insured credit unions (FICUs) to maintain a records preservation program to identify, store and reconstruct vital records in the event the credit union’s records are destroyed. Credit unions are required to maintain written policies and procedures for compliance with the rule.  

  • 750 Golden Parachute and Indemnification Payments

Part 750 applies to FISCUs by way of reference in § 741.224. The rule limits the ability of insured credit unions to indemnify senior officials being sanctioned for regulatory wrongdoing as well as providing excessive exit compensation to those officials.

  • 760 Loans in Areas Having Special Flood Hazards

Part 760 applies to FISCUs by way of reference in Part 741.216. The rule requires FICUs to maintain a Flood Act compliance program.

  • 761 Registration of Residential Mortgage Loan Originators

Part 761 applies to FISCUs by way of incorporation in Part 741.223. The rule now provides a cross reference to the CFPB’s Regulation G and mandating that mortgage loan originators be registered (or licensed if they work for a CUSO) with the Nationwide Mortgage Licensing System and Registry (NMLS).

  • 790 Description of NCUA; Requests for Agency Action

Part 790 establishes NCUA’s various offices and regions as well as establishes procedures for public to request agency action.

  • 791 Rules of NCUA Board Procedure; Promulgation of NCUA Rules and Regulations; Public Observation of NCUA Board Meetings

Part 791 governs NCUA conduct of business: from board meetings to rulemaking.

  • 792 Requests for Information under the Freedom of Information Act and Privacy Act, and by Subpoena; Security Procedures for Classified Information

Part 792 governs NCUA’s records. The provision covers Freedom of Information Act requests, NCUA’s keeping of non-public records, NCUA information security, NCUA’s handling of subpoenas, and the Privacy Act.

  • 793 Tort Claims Against the Government

This provision addresses litigating tort claims against NCUA.

  • 794 Enforcement of Nondiscrimination on the Basis of Handicap in Programs or Activities Conducted by the National Credit Union Administration 

Part 794 prohibits NCUA from discriminating on the basis of handicap.  

  • 796 Post-Employment Restrictions for Certain NCUA Examiners

Part 796 prohibits NCUA senior examiners from accepting employment with a FICU within 12 months of leaving service under certain circumstances.

  • 797 Procedures for Debt Collection

This provision authorizes NCUA to collect certain debts owed to the United States by individuals and entities.

21-RA-04 HMDA Data Collection Requirements for Calendar Year 2021

February 2021

NCUA Regulatory Alert 21-RA-04 to provide additional HMDA filing information for credit unions meeting the following criteria and subject to the CFPB’s Regulation C for filing mortgage data on the credit union’s 2021 activities in March of 2022

  • The credit union’s total assets as of 12/31/2020 exceeded $48 million;
  • The credit union had a home or branch office in a MSA on 12/31/2020;
  • The credit union originated at least 1 home purchase loan (other than temporary financing such as a construction loan) or refinanced a home purchase loan, secured by a 1st lien on a 1-4 unit dwelling during 2020; and
  • The credit union originated at least 100 covered closed-end mortgage loans orat least 500 covered open-end lines of credit in each of the 2 preceding calendar years (2019 and 2020).

Credit unions meeting all 4 criteria must collect HMDA data during this calendar year to be submitted by March 1, 2022. A credit union that does not meet all 4 criteria is exempt from filing HMDA data in 2022 for mortgage loan applications processed in 2021.

HMDA Data Partial Exemptions

Section 1003.3(c) of the HMDA rule contains a list of partial exemptions from the filing requirements. NCUA Regulatory Alert discusses some of these exemptions and provides an illustrative chart showing an example of how partial exemptions are applied.

The HMDA filing requirements include 48 total data points. Of these, 26 data points are not required to be collected and reported if a transaction qualifies for a partial exemption (reducing reporting to 22 data points only for qualifying institutions).

More information on partial exemptions is available in Appendix F of the 2020 A Guide to HMDA Reporting: Getting It Right!.

Recording of Jan. 25, 2021 Solar Winds Breach Webinar

(members only)

Click here to access the recording of the Jan. 25, 2021 webinar focusing on the Solar Winds/Orion hacking.

The webinar focuses on the latest information related to how the SolarWinds Orion “breach” was carried out along with secondary risks related to the SolarWinds software. The webinar also discusses the threat landscape through the analysis of case studies and examples for public disclosures.

21-RA-03 Submission of 2020 Home Mortgage Disclosure Act Data

February 2021

NCUA Regulatory Alert 21-RA-03 informs credit unions subject to HMDA reporting requirements in calendar year 2020 that loan/application data must be submitted to the CFPB by March 1, 2021. The requirement applies to credit unions that:

  • are located in metropolitan areas;
  • engage in certain types and volume of residential mortgage lending; and
  • had assets greater than $47 million as of December 31, 2019,

NCUA notes in the alert that the closed-end mortgage loan threshold increased from 25 to 100 effective July 1, 2020. Therefore, credit unions that originated fewer than 100 covered closed-end mortgage loans in 2018 or 2019 are not required to report any closed-end mortgage loan information for 2020.

Excluded transactions are listed in Section 1003.3(c) of Regulation C.

Submission Process for Data Collected in 2020

Credit unions must submit their HMDA data using the HMDA Platform. NCUA also notes:

  • Credit unions should use a modern web browser, such as the latest versions of Google Chrome, Mozilla Firefox, Internet Explorer 11, Safari or Microsoft Edge when accessing the platform.
  • The FFIEC has developed a loan/application formatting tool to help credit unions format data into the required pipe delimited text file (.txt) format.
  • All edits must be addressed prior to submission of the HMDA data. Edit reports may be viewed and downloaded from the Platform.
  • An authorized credit union representative must certify the accuracy of the submission on the Platform (emailed/fax certificates will not be accepted).

For more information:

Technical questions about reporting HMDA data collected in or after 2020 should be directed to [email protected].

NCUA reserves the right to assess CMP against credit union that fail to meet their applicable March 1, 2021 filing deadline.

21-RA-02 CFPB Publishes 2021 Threshold Adjustments Under Regulation C, Regulation Z and Regulation V

NCUA issued Regulatory Alert 21-RA-02 to inform credit unions on the CFPB’s threshold adjustments to Regulations C HMDA), Z (TILA) and V (FCRA). All three adjustments were effective on January 1, 2021.

  • Regulation C Data Collection Asset-Size Exemption Threshold

The Reg C  exemption threshold for 2021 increased to $48 million based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) in effect through November 30, 2020. Credit unions with assets of $48 million or less as of December 31, 2020 are exempt from collecting HMDA data in 2021.

  • Regulation Z Escrows and Small Creditor QMs Asset-Size Exemption Threshold

The Reg Z escrow and small creditor qualified mortgages (QMs) asset-size exemption threshold increased to $2.23 billion. Credit unions with assets of less than $2.23 billion at the end of last year are exempt if other provisions of Reg Z are also met).

  • Regulation V Credit Bureau Consumer Report Fee Ceiling

The ceiling on the fee a consumer reporting agency may charge for a consumer report in 2021 increased to $13.00, based proportionally on changes in the Consumer Price Index for All Urban Consumers (CPI-U). The ceiling does not affect the amount a credit union may charge its members or potential members, directly or indirectly, for obtaining a credit report in the normal course of business.  Such cost must however be accurately represented in all advertising, disclosures, or agreements, whether written or oral.