Proposed Rule Summary

Capital Planning & Stress Testing

Prepared by NASCUS Legislative & Regulatory Affairs Department
October 2017

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

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

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

Summary

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

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

Tier I credit unions

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

 

Tier II credit unions

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

Tier III credit unions

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

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

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

Stress Testing

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

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

• Web Site Instructions

 

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

Consultation with State Regulators

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

Technical and Conforming Proposed Changes

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

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

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

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

Summary: NCUA Proposal, Call Report Modernization

March 2018

NCUA is continuing its initiative, begun in 2016, to update and modernize the 5300 Call Report for credit unions. NCUA has proposed changes that it says will:

• Reduce roughly 40% of account codes
• Reduce the Profile input by 20%

NCUA has dedicated a resource page to the agency’s Call Report Modernization initiative.

Comments are due NCUA by close of business on April 2, 2018.

Summary

The Call Report currently in use by NCUA has 1,523 account codes. The revised version proposed by NCUA would retire 1,017 account codes and add 413 new account codes needed to accommodate changes such as FASB’s change to CECL (current expected credit losses) and RBC (risk-based capital). As a result, the proposed revised Call Report would have 919 account codes. The proposed revised Call Report also contains schedules reorganized by program and is designed to facilitate a user interface planned for NCUA CU Online as part of the NCUA’s Enterprise Solutions Modernization. NCUA has also revised the Call Report instructions.

Finally, NCUA is proposing changes to The Profile, eliminating approximately 150 data elements and attributes.

NCUA has asked commenters to consider the following questions:

• Are there account codes that are proposed to be retired that are still pertinent?

• Are there additional account codes that should be retired or consolidated?

• Are relocated account codes grouped logically?

• Should any of the schedules be expanded to assist in analysis based on new rules or accounting changes?

• Are the instructions adequate in both content and design?

• How much lead time do credit unions need to work with vendors to make changes to their systems in order to support such changes to the Call Report?

• Are there any other operational issues the NCUA should be aware of prior to implementing the proposed changes?

• From your perspective, do you think this is a reduction in your reporting burden?

Summary: NCUA Proposed Changes to its Bylaws for Federal Credit Unions (FCUs)

April 2018

The NCUA Board has issued an advance notice of proposed rulemaking (ANPR) to FCUs soliciting comments on ways to streamline, clarify, and improve the standard FCU bylaws. NCUA’s bylaws DO NOT APPLY to federally insured state chartered credit unions (FISCUs). NASCUS is providing this summary for any states that wish to review their state bylaw requirements for FISCUs in light of NCUA’s initiative.

FCU Bylaw Background

NCUA used to not have formal bylaws as part of its rules and regulations. At that time, FCUs had broad discretion to craft bylaws as they saw fit so long as their governance and bylaws was consistent with the Federal Credit Union Act (FCUA).  When disputes arose between FCU members and their FCU regarding governance, NCUA allowed those disputes to be resolved thru the normal corporate governance resolution processes found in state court. In 2007, dissatisfied with some state court interpretations of the relationship between FCU members and their FCUs and feeling it lacked an ability to regulate in the area of governance, NCUA incorporated standard bylaws into its regulations for FCUs.

NCUA Request for Comments and Input

NCUA is focused on the following areas for FCU bylaw reform:

1. Improving the process by which FCUs amend their bylaws. A FCU seeking to amend its bylaws must submit the proposed changes to NCUA for approval. Currently NCUA has not mandatory timeframes for responding to such requests. NCUA sees the need to create a faster/more efficient bylaws amendment process as essential for safety and soundness.
2. Limitation of service or expulsion of members. FCUs may limit services or access to credit union facilities to ‘‘a member who is disruptive to credit union operations.’’ NCUA has interpreted this to mean that an FCU may limit services to an FCU member in cases where the member is abusive to FCU staff or has caused a loss to the FCU. However, for FCUs, NCUA has also identified limitations on the ability to expel a member or limit services such as notice requirements, requirements for a nexus between conduct and service limited, and limitations imposed by contractual provisions and disparate impact analysis.
3. Improving FCU bylaws to facilitate recruitment of qualified directors. NCUA seeks ways to enhance FCU ability to recruit qualified directors. NCUA is considering adding commentary to its model bylaws that give FCUs examples of criteria to be considered when identifying candidates for vacant director seats as well as considering authorizing FCUs to create advisory committees to help recruit director candidates.
4. Attendance at annual meeting. NCUA is interested in ways that it can improve the standard bylaws to encourage active member participation in annual and special meetings. NCUA bylaws mandate that the secretary of the FCU must provide members with at least 30 but not more than 75 days written notice before the date of any annual meeting. For a special meeting, the written notice must be at least 7 days before the date of the special meeting. NCUA seeks input on whether those time frames are adequate to ensure member attendance at meetings. NCUA also seeks input on use of new technologies such as web-based conferencing to enhance member participation. (NASCUS Note: Washington State has issued guidance to its FISCUs regarding “hybrid” virtual meetings. See https://dfi.wa.gov/sites/default/files/credit-unions/bulletins/b-17-17.pdf.)
5. Overlapping requirements. NCUA has identified a number of its regulations that overlap with the FCU bylaws addressing issues such as FCU member confidentiality, conflicts of interest, record retention, and the availability of books and records to FCU members. NCUA seeks specific input as to whether the duplication should be eliminated.

-End-

Final Rule Summary: Accuracy of Advertising and Notice of Insured Status

Prepared by NASCUS Legislative & Regulatory Affairs Department
April 2018

NCUA has amended Part 740, its advertising rule, to provide federally insured credit unions (FICUs) with more flexibility in the use of the official advertising statement. Part 740 applies to federally insured state chartered credit unions (FISCUs) by reference in Part 741.211. The new final rule:

• Allows FICUs to use a new 3rd version of the official advertising statement, “Insured by NCUA”
• Expands the official statement exemption for TV and radio advertising spots  from 15 seconds to 30 seconds
• Eliminates the requirement for the inclusion of the official advertising statement on statements of condition required to be published by law.

The final rule may be read in its entirety here. The rule will be effective 30 days after it is published in the Federal Register.

Background

The Federal Credit Union Act (FCUA) requires FICUs to display NCUA’s “official sign.” By regulation, NCUA implements the FCUA by requiring FICUs include an official statement in their advertising and display an official sign on their premises.

Prior to the final rule, FICUs had 3 options for the official statement:

• “This credit union is federally insured by the National Credit Union Administration”
• “Federally insured by NCUA”
• As an alternative, the FICUs may use an image of the official sign

Under the “old” rule, the following advertisements did not need to include the official advertising statement:

• Credit union supplies such as stationery (except when used for circular letters), envelopes, deposit slips, checks, drafts, signature cards, account passbooks, and non-insurable certificates
• Signs or plates in the credit union office or attached to the building or buildings in which the offices are located
• Listings in directories
• Advertisements that don’t use the credit union’s name
• Display advertisements in credit union directories, provided the name of the credit union is listed on any page in the directory with a symbol or other descriptive matter indicating it is insured
• Joint or group advertisements of credit union services where the names of insured credit unions and noninsured credit unions are listed and form a part of such advertisement
• Advertisements by radio and television that were less than fifteen (15) seconds (now 30 seconds under the new final rule)
• Certain promotional materials such as calendars, matchbooks, pens, pencils, and key chains etc. that because of the size would be impractical to include the statement
• Advertisements that contain a statement to the effect that the credit union is insured by the NCUA, or that its accounts and shares or members are insured by NUCA to the maximum insurance amount for each member or shareholder
• Advertisements not relating to member accounts, such as advertisements relating to loans by the credit union, safekeeping box business or services, traveler’s checks on which the credit union is not primarily liable, and credit life or disability insurance.

With the publication of the new final rule, credit unions have the option of using a third official statement “insured by NCUA” in their advertisements as well as the 4th option of including the official sign.

In addition, credit unions will no longer need to use the official statement in radio or television advertisements less than 30 seconds in duration. This increase from the 15 second exemption (established in 2011) to 30 seconds puts credit unions on par with FDIC/banking rules which create a 30 second exemption for banks.

The new rule eliminates the 2011 requirement that FICUs include the official statement on statements of condition required to be filed by law.

With respect to social media, NCUA determined that given the rapidly evolving nature of social media, it was best to defer making changes to the advertising rule regarding social media.

Final Rule Summary:  NCUSIF Equity Distributions

Prepared by NASCUS Legislative & Regulatory Affairs Department
April 2018

NCUA has promulgated a final rule amending the regulations for calculating credit unions’ pro rata share of a declared equity distribution from the National Credit Union Share Insurance Fund (NCUSIF). NCUA also finalized temporary provisions governing NCUSIF equity distributions related to the merger of the NCUSIF and the Temporary Corporate Credit Union Stabilization Fund (TCCUSF).

The final rule may be read in its entirety here. The rule was effective March 26, 2018. Part 741.13 of the rule is effective from March 26, 2018 until December 31, 2022.

Summary

The Federal Credit Union Act (FCUA) requires NCUA to make a pro rata equity distribution from the NCUSIF to all federally insured credit unions (FICUs) at the end of each year provided the following conditions are met:

1. The NCUSIF has no outstanding loans from the Treasury Department
2. The NCUSIF’s equity ratio exceeds the normal operating level set by the NCUA Board (currently 1.39%)
3. The NCUSIF’s available assets ratio exceeds 1 percent

NCUA’s final rule establishes two methodologies to govern future NCUSIF distributions.

One methodology governs future distributions until December 31, 2022. This methodology accounts for the assessments credit unions paid into the TCCUSF, and reflects NCUA’s determination that any NCUSIF distributions between now and the end of 2022 are related to the merger of the insurance fund with the TCCUSF and represents a rebate to insured credit unions of excess stabilization fund assessments.

The other methodology will govern distributions declared after December 31, 2022.

1. Four-Quarter Average Method

For NCUSIF equity distributions, NCUA is adopting a four-quarter average approach that relies on the use of quarterly Call Report data to determine an eligible financial institution’s pro rata share of the distribution. Pursuant to this approach, a credit union must have filed at least one Call Report for a reporting quarter in the year for which a distribution was declared to be eligible for a share.

With respect to mergers, the new NCUSIF distribution rules will combine the insured shares of the merging credit unions IF the discontinuing credit union filed a call report for at least one of the cycles in the year for which the distribution is declared. NCUA will also use this approach for purchases and assumption situations where a continuing credit union acquires all of the insured shares of another credit union.

NCUA will utilize a four-quarter look-back period to determine the four-quarter average of insured shares.

2. Termination of NCUSIF Insurance

Section 741.4(e)(4)(i)(C) of the final rule will retain the right of credit unions that terminate NCUSIF share insurance during the year for which a dividend is declared to receive a prorated share of the distribution. The credit union terminating share insurance must have filed at least one Call Report for a reporting period in which the distribution is declared.

NCUA will calculate the prorated distribution of a credit union that terminates NCUSIF coverage by applying the general four-quarter average approach set out in § 741.4(e). For reporting periods where the credit union did not maintain NCUSIF coverage, it will be treated as having no insured shares in that period.

NCUA notes that it will continue to study this issue to determine whether a credit union that terminates NCUSIF coverage is entitled to any prorated distribution.

3. Section 741.13 NCUSIF Equity Distributions Related to the CSRP

Between now and the end of 2022, NCUA will presume that any distributions from the NCUSIF are related to the Corporate System Resolution Program (CSRP) and the TCCUSF. In order to calculate distributions from the NCUSIF to insured credit unions, NCUA will adopt a modified version of the four-quarter average method that will include five separate look-back periods tied directly to the beginning of the CSRP and corresponding to each calendar year for which the Board may declare an equity distribution related to the CSRP.

As with the four-quarter average approach, under this extended look back approach, an eligible credit union must file at least one quarterly Call Report for a reporting period in the calendar year for which the Board declares an equity distribution to receive a pro rata share of that distribution. Otherwise, that credit union will not receive an equity distribution for that calendar year nor will its insured shares be used to calculate the aggregate average amount of insured shares used to determine each eligible financial institution’s pro rata share of the distribution.

4. Calculation of Pro Rata Share of NCUSIF Distribution.

To calculate a credit union’s pro rata share of an NCUSIF equity distribution, NCUA will divide the dollar amount of the declared NCUSIF equity distribution by the aggregate average amount of insured shares for that calendar year and then multiplying by the credit union’s average amount of insured shares.

5. Rules for Newly Chartered Credit Unions and Conversion of Insurance

NCUA is relocating the provisions related to new charters within from §741.4(g) to new §741.4(e) and clarifying that a new charter may both receive an equity distribution unless it has both fully funded its capitalization deposit and filed at least one report during the reporting periods for the year in which the distribution was announced.

NCUA is making other technical changes to align the rules for the pro rata share of a credit union converting to NCUSIF insurance to reflect the four-quarter look back rather than the previous months of coverage method.

NCUA will also replace existing “Appendix A” to §741 with examples and Frequently Asked Questions.

 

NCUA Proposed Rule Payday Alternative Loans Summary

Prepared by NASCUS Legislative & Regulatory Affairs Department May 2018

NCUA is proposing to allow federal credit unions (FCUs) to offer an additional payday alternative loan (PALs) option as part of FCU lending authority. The changes proposed by NCUA would not replace the existing PALs rule (PALs I). Rather, the proposal would create a second variation (PALs II). The new proposed PALs II loans would incorporate the requirements of PALs I with these differences:

• The minimum and maximum amount of the loans would differ
• The number of loans a member could receive in a 6-month period would differ
• There would be no minimum length of membership requirement
• The maximum maturity would differ

NCUA also seeks comments whether a PALs III should be created with differing fee structures, loan features, maturities, and loan amounts.

 

This proposed rule, and the existing PALs rule, apply directly only to FCUs. Federally insured state chartered credit unions (FISCUs) should look to state law and state regulation for their ability to make PALs loans.

 The proposed rule may be read in its entirety here. Comments are due to NCUA 60 days after the proposal is published in the Federal Register.

Background & Summary

 

NCUA authorized PALs I for FCUs in 2010. The framework for PALs I loans is as follows:

PALs I Limitations

Interest Rate	Generally no more than 1000 basis points above the regular interest rate set by NCUA for FCUs
Nature of Loan	Closed-end
Limitations on Loan Principle	Minimum $200 – Maximum $1000
Limitations on Loan Terms	Between 1 and 6 months
Aggregate Loans to 1 Member	No more than 1-at-a-time nor more than 3 loans w/in 6 months

 

Rollovers	Prohibited but extensions w/in maximum loan term permitted so long as no fees nor new credit
Amortization	Full
Membership Requirement	1 Month
Application Fee	Must reflect actual costs and may not exceed $20.00
Aggregate Program Limit	20% of net worth

 

Current Data on Pals I Loans

 

December 31, 2017 5300 call report

Loans Outstanding	190,723
FCUs Offering PALs I	518
Aggregate Balance of PALs I	$132.4 million

 

Proposed PALs II

 

NCUA is proposing the creation of a second payday alternative loan to compliment PALs

1. The new PALs II option for FCUs would incorporate many of the existing provisions of PALs I, but would differ in a few significant respects. FCUs could make either PALs I or PALs II or choose to offer

 

Feature	PALs I	Proposed PALs II
Permissible Interest Rate	1000 basis points above the general interest rate set by NCUA	1000 basis points above the general interest rate set by NCUA
Loan Structure	Closed-end	Closed-end
Application Fee	Must reflect actual costs and may not exceed $20.00	Must reflect actual costs and may not exceed $20.00
Rollovers	Rollovers prohibited, but PALs I loan may be extended to maximum loan term (6 months)	Rollovers prohibited, but PALs I loan may be extended to maximum loan term (12 months)
Aggregate Lending Cap	20% Net Worth	20% Net Worth
Amortization	Must fully amortize	Must fully amortize
Loan Amount	Minimum $200 – Maximum $1000	No minimum – Maximum $2,000.00
Loan Term	Minimum 1 month – Maximum 6 months	Minimum 1 month – Maximum 12 months
Membership Requirement	Minimum 1 month	No length requirement
Number of Loans to same Member	No more than 1-at-a-time nor 3 loans w/in 6 months	Only 1 loan at a time but no limit on how many times loans made to same member

 

Compliance with CFPB Payday Loan Rule

 

On November 17, 2017, the CFPB issued its final Payday Loan Rule, establishing consumer protections for certain credit products and deeming certain practices to be abusive and unfair. Practices deemed abusive and unfair include:

 

• Failing to reasonably determine that a borrower has the ability to repay a loan in accordance with its terms
• Attempting to withdraw payments from a borrower’s account after two consecutive payments attempts have failed

 

CFPB has granted a safe harbor for any loans made pursuant to NCUA’s PALs I rule, exempting PALs I loans from the Payday Loan Rule. PALs II loans DO NOT automatically qualify for the PALs I safe harbor/exemption. However, the CFPB’s rule also provides a partial exemption for “alternative loans” that meet all of the requirements of the current PALs I rule, not including:

 

• the minimum membership requirement; nor the
• limit on the number of loans provided to any one borrower in a six-month period

 

Therefore, a FCU could structure PALs II loans to qualify for an exemption from the CFPB Payday Loan Rule. However so doing would mean foregoing the option of making PALs II loans up to $2,000.00 and issuing 12 month terms. This would be a business decision for the FCU.

NCUA additional request for comments:

 In its proposal, NCUA indicates it is seeking additional comments on further refining payday alternative lending for FCUs. NCUA asks what additional authority FCUs should have, what loan features should be considered, and whether PALs III and additional loan packages should be formally proposed/developed.

 

 

Final Rule Summary: Part 709, Involuntary Liquidation of FCUs and Claims Procedures

Prepared by NASCUS Legislative & Regulatory Affairs Department
June 2018

NCUA is amending part 709 of its rules and regulations that establish the procedures that apply to the administration of claims for federally insured credit unions that enter involuntary liquidation. The rule clarifies the requirements for proof of a claim by an employee for pay or benefits (i.e. unpaid wages, sick time or vacation time) and distinguishes  between employees’ claims and claims by credit union executives that constitute a golden parachute.

The final rule may be read in its entirety here. The rule will be effective 30 days after it is published in the Federal Register.

This rule applies to both federal credit unions and federally insured state chartered credit unions.

Summary

Section 207(b)(4) of the Federal Credit Union Act authorizes NCUA to promulgate rules governing the recognition or rejection of claims by the liquidating agent and providing for administrative determination of claims and review of such determination. NCUA is also authorized to prohibit “golden parachute payments,” defined to include payments that are contingent on the termination of the party’s employment at the credit union and that are made when the credit union is in troubled financial condition.

With this rule, NCUA is expanding the definition of permissible employment-related claims to include vacation, sick, and severance pay if the payment is supported by an employee handbook or other credit union record and is calculable in accordance with a formula or criteria available to all employees. This expansion represents an exception to the general rule in § 750 providing that all claims for employee welfare benefits are not provable against the liquidating agent.

In order to be provable in liquidation, claims for wages and salaries, including vacation, severance, and sick leave pay must 1) be provided for in the credit union employee handbook or other written credit union record, 2) be calculable in accordance with an objective formula, and 3) must be available to all employees who meet applicable eligibility requirements, such as minimum length of service. Such payment may also be provable in liquidation if it is required by applicable state or local law.

Final Rule Summary: Amendments to Part 723, Commercial Lending, to Remove Non-Owner Occupied 1-4 Family Dwellings from the Definition of a Member Business Loan 

Prepared by NASCUS Legislative & Regulatory Affairs Department
June 2018

NCUA has amended the definition of member business loan (MBL) in its commercial lending rule with respect to 1- to 4- family dwellings. The change conforms to changes made to the Federal Credit Act (FCUA) by the S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act (Economic Growth Act).

The changes to Part 723 and Part 702 became effective on June 5, 2018. The Federal Register notice is available here.

Prior the passage of the Economic Growth Act, the FCUA defined an MBL as any loan, line of credit, or letter of credit, the proceeds of which will be used for a commercial, corporate or other business investment property or venture, or agricultural purpose. The definition excluded any extension of credit that is fully secured by a lien on a 1-4 family dwelling that is the primary residence of a member. The Economic Growth Act removed the “primary residence of the member” qualifier. As a result, the definition of an MBL now excludes all extensions of credit that are fully secured by a lien on a 1-4 family dwelling regardless of whether it’s the primary residence of the borrower or not. Because these kinds of loans are no longer considered MBLs, they do not count towards the aggregate MBL cap imposed on each federally insured credit union by the FCUA.

The following changes were made to § 723:

• § 723.8(b) is revised by adding subsection (3) to include any loan that is fully secured by a lien on a 1-4 family dwelling as an exception to the MBL definitions.
• § 723.8(c) is revised to remove the reference to a 1-4 family dwelling as an MBL

The final rule also makes corresponding changes to Part 702, NCUA’s Prompt Corrective Action rule, by amending outdated citations to the MBL rule. Specifically, § 702.104 (a), (b), and (g) are amended to replace references to Part 723.1 with a reference to § 723.8(b) wherever they appear. The rules also replaces references to § 723.20 are replaced with reference to § 723.10 in those same sections.

Part 701 – Federal Credit Union Chartering & Field of Membership
Final Rule 

Prepared by NASCUS Legislative & Regulatory Affairs Department
June 2018

• allow FCU to submit a narrative to establish the existence of a well-defined local community (WDLC) instead of limiting FCUs to pre-designated presumptive communities
• establish a process for the holding of a public hearing and invite public comment on FCU applications for a WDLC that would exceed 2.5 million people
• permit FCUs to designate a portions of a community that is subdivided into metropolitan divisions as its WDLC without regard to division boundaries

NCUA notes that it believes the final rule is compatible with the recent District Court opinion regarding its 2017 final FCU field of membership (FOM) rule. (See NASCUS’ summary of the court’s ruling here.)

The final FCU FOM rule is available here. The rule will take effect on September 1, 2018.

The rule applies only to FCUs.

Summary
NCUA’s FOM rules for FCUs (the Chartering Manual) are incorporated in Appendix B to part 701 of the NCUA’s regulations as prescribed by Section 1759 (§109) of the Federal Credit Union Act (FCUA). In general, FCUs may choose one of three charter types:

• a single group sharing a single occupational or associational common bond;
• a multiple common bond of groups that each have a distinct occupational or associational common bond among group members; or
• a community common bond among persons or organizations within a WDLC, neighborhood, or rural district

With respect to the community FOM, the FCUA does not define a WDLC, neighborhood, or rural district. Those definitions are provided by regulation. To qualify as a WDLC, neighborhood, or rural district, NCUA requires the area being sought by the FCU to have specific geographic boundaries.

• Pre – 2010 Community FOM Requirements

Until 2010, NCUA required FCUs to submit a narrative identifying common interests and interactions among residents of the proposed area IF the proposed area was larger than a single political jurisdiction. The regulation also required the community to be contiguous.

• 2010 Narrative Approach Replaced by 2 Presumptive Community Models

In 2010, NCUA abandoned the narrative approach and instead established 2 presumptive communities that were regulatory defined as WDLC for purposes of FOM. One of the presumptive communities is any single political jurisdiction (regardless of the population), defined by the Chartering Manual as a city, county, or the political equivalent of those, or a portion of one of the former. The other presumptive WDLC is Core Based Statistical Area (or portion of one) as designated by the US Census Bureau and limited to a population cap of 2.5 million. If the FCU was seeking a portion of the Core Based Statistical Area, the proposed FOM had to conform to existing political boundaries within that area. For both presumptive communities, a FCU was required to demonstrate an ability to serve the proposed area.

Note that although NCUA continued to require contiguous communities, the word “contiguous” was inadvertently dropped from the regulatory text with the 2010 changes.

NCUA Proposed 3 Changes in 2016
In October, 2016, NCUA proposed 3 changes to the community FOM:

• A return to use of narrative to establish a community as an alternative to the 2 presumptive communities
• Increasing from 2.5 million to 10 million the cap on the population of a presumptive community
• Permitting an FCU to designate a portion of a statistical area as its community without regard to metropolitan division boundaries

Final Rule: Changes to FCU Communities
As noted above, NCUA has finalized several changes to the FCU community charter. The changes are as follows:

• Communities must be contiguous – NCUA has re-inserted the word “contiguous” in the regulatory text to reflect NCUA’s longstanding interpretation that a community must be contiguous.
• Narrative Approach – NCUA will re-introduce the narrative approach as an option for a FCU to define a custom drawn community. To assist FCUs seeking to use the narrative approach, NCUA has articulated 13 criteria that characterize a commonality among residents that a FCU should address in its narrative. NCUA notes that a FFCU need not demonstrate in totality all 13 criteria, but rather a totality of the circumstances within the criteria a FCU addresses must indicate a sufficient presence of common interests or interaction among the area’s residents.

Criteria	Most Persuasive	Persuasive	Least Persuasive
Presence of a Central Economic Hub An economic hub is evident when 1 political jurisdiction within a proposed community has a large percentage of the population or is the primary location for employment. Major employers and their locations within the proposed community should be identified.	At least 25% of the workers living in the proposed community commute to work in the central economic hub.	Over 15% of the workers living in the proposed community commute to work in the central economic hub.	Less than 15% of the workers living in the proposed community commute to work in the central economic hub.
Quasi-Governmental Agencies (QGAs) The existence of organizations such as economic development commissions, regional planning boards, & labor or transportation districts can be important factors. The more closely their service area matches the proposed FOM, the greater the showing of interaction/common interests.	The QGA covers the entire community exclusively, derives leadership from the area, & represents collaboration that transcends traditional county boundaries. Has meaningful objectives that advance residents’ common interests in economic development and quality of life.	The QGA substantially matches the proposed community and carries out objectives that affect the relevant common interests for the entire area’s residents.	The QGA does not match the proposed community and carries out only incidentally relevant objectives or carries out meaningful objectives in only localized sections of the proposed community.
Governmental Designations Designation of the community by a government agency as a region or district (such as a regional water, transportation, or tourism district) is a factor that can be considered in determining whether the area is a local community.	A division of a state or federal agency designates the proposed area as it service area or target area for specific programs.	A division of a state or federal agency designates a regional area that includes the proposed community, but offers special programs tailored to the interests of the residents of the proposed community	A division of a state or federal agency designates an area that includes several communities.
Shared Public Services/Facilities The existence of shared services & facilities, such as police, fire protection, park districts, public transportation, airports, or public utilities, can demonstrate an area is a community. The more closely the service area matches the geographic boundaries of the community, and the higher the percentage of residents throughout the community using those services or facilities, the more valuable the data.	Data documents that residents from entire proposed community benefit from a public facility. Formal agreements exist across political boundaries to provide for a common need such as shared police and fire protection.	Public facilities exist that cross county lines and cover the majority of the proposed community’s population but does not cover the area in its entirety.	Public facilities serve areas that do not correspond to the proposed community.
Hospitals and Major Medical Facilities Medical facility data should include admittance/discharge statistics showing use by residents throughout the proposed community. Data may also show the importance of an area hospital to the proposed community, that the hospital specifically targets the community or the distribution of hospitals over a larger area.	Narrative presents evidence that residents throughout the proposed community use hospitals in the major population or employment center.	Statistical data may not be available, but narrative demonstrates by other sources that a medical facility is the only viable option for a significant portion of the proposed community’s residents.	The proposed community has multiple medical facilities that are geographically dispersed but offer duplicative services.
Colleges & Universities Enrollment data can be a useful factor in establishing a WDLC. The higher the percentages of student enrollment at a given campus by residents throughout each part of the community, the greater the value in showing interaction. Additionally, the greater the participation by the college in community initiatives the stronger the value of this factor.	Institutions of higher learning identified in the narrative attract significant numbers on enrollees from throughout the proposed community.	Statistical data on student origin is inconclusive or unavailable. However information exists that demonstrates the institutions’ relevance to the entire proposed community (such as partnerships with businesses or local schools).	Statistical data indicates the institutions’ recruit and draw students from a broad area transcending the proposed community.
Mutual Aid Agreements  The existence of written agreements among law enforcement & fire protection agencies in the area to provide services across multiple jurisdictions can be an important factor.	Mutual aid agreements covers the proposed community exclusively and in its entirety.	Mutual aid agreements substantially match the proposed community.	Mutual aid agreements do not match the proposed community.
Organizations & Clubs  The more closely the service area of an organization or club matches the proposed community, & the greater the percentage of membership and services throughout the community, the more relevant the data.	Statistical data supports that organizations with meaningful objectives serve the entire proposed community.	Other qualitative documentation shows that organizations with meaningful objectives serve the entire proposed community.	Applicant lists organizations that either do not cover the entire proposed community or have objectives too limited to have meaningful impact on residents’ common interest
Community Newspaper  A newspaper’s subscription base in the proposed FOM can be an indication of common interests or interaction. Subscription data may include print copies as well as on-line access.	Statistical evidence indicates the community’s residents read the local newspaper which carries local stories & has a marketing area consistent with the community.	Local newspapers and periodicals specifically cater to the proposed community.	The area lacks a general newspaper that covers the proposed community. There is no specialized publications catering to the entire proposed community.
Entertainment & Sporting Events  Data showing residents from the proposed community attend the same events might indicate commonality. For sporting events, as well as some entertainment events, data on season ticket holders and memberships may be available.	Statistical data exists demonstrating that the venue(s) attracts residents from throughout the community.	Statistical data is not available, but other qualitative information demonstrates the importance of the venue(s) for the residents of the proposed community.	The applicant lists local venues w/o discussing where users originate from or otherwise documenting relevance to the proposed community.
Local TV & Radio Stations  A television or radio station broadcasting in an area can be an indication of common interests or interaction. Data on viewer and listener audiences in the proposed community can support the existence of a community.	Statistical evidence indicates a significant portion of residents from throughout the proposed community watch/listen to local stations. The media has local stories and a marketing area matching the proposed community.	The television and radio stations provide news and sports coverage specifically catering to the proposed community.	The area lacks television or radio stations serving the proposed community.
Shopping The narrative must identify the location of the major shopping centers & include the percentage of shoppers coming from each part of the community. Identification of the shopping center’s target area can be of value.	The narrative provides reliable statistics demonstrating the shopping facility is the major facility for residents from the entire proposed community.	Narrative demonstrates how area’s shopping facilities are clustered in community’s hub and residents do not have practical alternatives to meet shopping needs.	Applicant lists large shopping facilities without providing statistics or other documentation demonstrating relevance to proposed community.
Geography Some communities face varying degrees of geographic isolation, with travel outside the community limited by mountain ranges, forests, national parks, deserts, bodies of waters, etc. This factor, and the relative degree of isolation, may contribute to a finding of common interests or interaction.	Area is geographically distinct or isolated from immediate surrounding areas.	Area has geographic commonalities that influence other aspects of residents’ lives.	The area’s geographic features do not appear to influence other social or economic characteristics of the area.

• Public Hearing – NCUA’s office of Credit Union Resources and Expansion (CURE) will hold public hearings to consider any narrative community charter application that includes an area with greater than 2.5 million people. CURE will publish notice in the Federal Register setting the date, time, and location for the hearing. The public hearings will be capped at 4 hours in length with no more than 8 participants, to include the FCU applicant, the first 6 entities to contact NCUA in writing and one participant at NCUA’s discretion.

In addition to the presentations at the public hearing, statements in writing may be submitted to CURE at least twenty business days prior to the hearing. NCUA’s CURE will approve, deny, or make modifications to the application based on the information presented at the hearing and in writing, as well as based on the FCU’s application.

• Portion of CBSA as a WDLC – An FCU may now also designate a portion of a CBSA as its community without regard to metropolitan division boundaries. To be a presumptive community, the area must have a population of 2.5 million or less.

 

Part 701 & 708b – FCU Bylaws and Voluntary Mergers of Federally Insured Credit Unions

Final Rule Summary
Prepared by NASCUS Legislative & Regulatory Affairs Department
July 2018

NCUA has published a final rule to add additional requirements to the voluntary mergers of federally insured credit unions (FICUs). At-A-Glance, the final rule will:

• Revise and clarify the contents and format of the member notice
• Require merging credit unions to disclose “merger-related compensation” provided to “covered persons”
• Increase the minimum member notice period
• Provide a method for members and others to submit comments to the NCUA regarding the proposed merger.

In addition, NCUA will retire its merger manual, and incorporate model forms conforming to the rule within a new sub-part to its merger rule.

NCUA’s merger rule, Part 708b, applies to federally insured state credit unions (FISCUs) by way of reference in §741.208 of NCUA’s Rules & Regulations.

The final merger rule is available here. The rule will take effect on October 1, 2018.

Summary
NCUA’s revised final voluntary merger rule will require FICUs to disclose to members any ‘‘merger-related financial arrangement’’ provided to a ‘‘covered person.’’ The rule also provides for NCUA to create a website where members may comment on the proposed merger.

• Covered Persons

The current merger rule’s definition of “senior management official” is replaced by a definition of “covered person” that includes:

• the chief executive officer or manager (or a person acting in a similar capacity)
• each of the four most highly compensated employees (other than the CEO)
• any member of the board of directors or the supervisory committee

Note: NCUA’s rule explicitly cites the supervisory committee. However, not all FISCUs have a supervisory committee by that name. Some utilize an audit committee with similar authorities, but NCUA’s rule is silent as to an audit committee’s inclusion in the definition of “covvered person.”

• Merger-Related Compensation

Since 2007, NCUA has required disclosure of merger related financial arrangements to the merging credit union’s members. Merger related financial arrangements was defined as any increase in compensation or benefits that represented an increase in compensation of 15% or $10,000. Under the new rule, merging credit union will disclose merger related financial arrangements, defined as “a material increase in compensation or benefits because of, or in anticipation of, a merger that any covered person of a merging credit union has received during the 24 months before the date the boards of directors of both credit unions approve the merger plan.” The definition includes a material increase in compensation or benefits that any covered person will receive in the future because of the merger.

The rule does not require disclosure of material increases in compensation resulting from employer-provided medical insurance, retirement, and other benefits offered on a non-discriminatory basis to all employees of the continuing credit union.

• 24-Month Lookback and Certification

The final rule requires the merging and continuing credit unions to submit to NCUA copies of any board minutes from the previous 24 months that mention “the merger.” The rule also requires the CEOs and Board Chairs of both credit unions to sign the certification form now included in Part 708b.304(c) that stipulates that the merger submission to NCUA includes all merger related financial arrangements for covered persons.

• Record Date

The final rule adds a formal definition of “record date” that requires credit unions to set the date by which persons must have been members of the credit union to vote on the merger proposal.

• Timing Requirements for Member Notice

Under the current rule, a merging credit union can give its members as brief a notice as seven days. Under the final rule, the merging credit union will be required to give members at least 45 days, but no more than 90 days, notice before the meeting where the vote will take place.

• Contents of Member Notice

The final rule reorganizes the list of required information for the notice to members by adding explicit requirements that the credit unions explain to members in understandable language the relative net worth of the two credit unions and whether any of the merging credit union’s net worth will be returned to members. Members must be informed of the website being created by NCUA for the sharing of comments on the merger, and the merger’s effect on ATM access and other services.  In addition, merging credit unions will also be required to include a plain language summary statement of all required disclosures without referring members to a separate attachment, although credit unions will still be allowed to provide additional information in attachments.

• Member Comments on the Proposed Merger Transaction

NCUA did not finalize the section of its proposed merger rule that would have required merging credit unions to facilitate member-to-member communications regarding the merger. Rather, NCUA will facilitate member-to-member communications by creating a
NCUA website where merger information and member comments will be posted. Members may submit comments to NCUA for posting both electronically and by mail. The website will also include non-confidential portions of merger applications. The member notice will include a link to the website where the merger application and comments will be available, as well as information about how to submit a comment. NCUA states that it only post comments from members (but does not indicate how it intends to verify membership). NCUA will also review all comments before posting to “ensure they are appropriate and limited to the topic of the merger.”

New Part 708b.304: Forms

NCUA has included model forms in a new §708b.304. The forms are similar to the existing forms in the merger manual with the exception od of the Member Notice which has been revised pursuant to the new rule.

Use of the forms IS NOT mandatory. However, NCUA notes that review of “custom” forms will add to the length of time taken for approval. Credit unions are free to choose the model forms or customize/create their own. The one exception is he certification form found in new §708b.304(c).

Proposed Rule Summary

NCUA Part 702: Risk-Based Capital Supplemental Rulemaking

Prepared by NASCUS Legislative & Regulatory Affairs Department
August, 2018

NCUA is proposing several changes to its final Risk-Based Capital rule, including delaying its effective date from January 1, 2019 to January 1, 2020. The proposal would also amend the definition of a ‘‘complex’’ credit union for risk-based capital purposes by increasing the threshold from $100 million to $500 million in assets. This change would exempt an additional 1,026 credit unions from the risk-based capital requirements.

Rule-at-a-Glance

• Delays effective date of NCUA’s risk-based capital rule to January 1, 2020
• Current requirements remain in place until new RBC rule takes effect in 2020
• Raises threshold for complex credit unions to $500 million in assets
• Changes the criteria that was used to determine asset threshold for covered credit unions

NCUA’s proposed rule may be read here. The proposed rule is open for comment until September 7, 2018.

Summary

In October 2015, NCUA published the final Risk-Based Capital (RBC) rule amending part 702 of the agency’s rules and regulations for Prompt Corrective Action (PCA). The 2015 final RBC rule applied to natural person federally insured credit unions (FICUs) with quarter-end assets exceeding $100 million.

A NASCUS summary of the 2015 final RBC rule is available here. NCUA also has a resource page on its website dedicated to the RBC 2015 rule, and an FAQ on the 2015 RBC rule.

1. $500 million threshold

NCUA proposes raising the threshold for being a complex credit union, and subject to the rule, to $500 million. This would exempt another 1000+ credit unions from the risk based requirements. NCUA continues to assert that an asse- based threshold, as opposed to a portfolio risk based standard is the better approach for ease of administration in identifying covered credit unions.

2. Further delayed effective date: January 1, 2020

NCUA is proposing further delaying the effective date of the rule another year to January 1, 2020. NCUA states the delayed effective date would provide covered credit unions additional time to adjust systems, processes, and procedures. In addition, NCUA has yet to issue guidance for examiners, or covered credit unions, as to how RBC will be implemented from a supervisory perspective.

Finally, NCUA has yet to issue a supplemental capital rule as a companion rule to RBC. NCUA has repeatedly assured the credit union system it would develop supplemental capital for covered credit unions to help meet RBC requirements.

3. Changes to the Original Complexity Index (OCI)

In order to establish the asset threshold at which a credit union is categorized as complex, NCUA developed a “complexity index” in the 2015 RBC rule (known as the Original Complexity Index). The OCI counted the number of complex products and services provided by credit unions based on 14 indicators:

Complexity Index