NCUA Interim Final Rule: Parts 702 & 723 PPP Loans & PCA and MBL         

NCUA Interim Final Rule: Parts 702 & 723 PPP Loans & PCA and MBL

Prepared by NASCUS Legislative & Regulatory Affairs Department
May 2020

NCUA issued this interim final rule (IFR) to make conforming amendments to Part 702, Prompt Corrective Action (PCA) and Part 723, Commercial Loans, following the enactment of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and subsequent implementation of the Paycheck Protection Program (PPP).

The IFR makes the following changes to NCUA’s rules:

  • Part 702.2 is amended to allow credit unions to exclude from the calculation of total assets when calculating net worth ratio any loans pledged as collateral for a non-recourse loan that is provided as part of the Federal Reserve Board’s Paycheck Protection Program Lending Facility
  • Part 702.104 is amended to included PPP loans as low risk assets for the purposes of risk weighting under PCA
  • Part 723.2 is amended to excluded PPP loans from accredit unions MBL cap calculation

The Interim Final Rule proposed rule may be read here. The rule became effective upon publication on April 27, 2020.

Comments are due to NCUA May 27, 2020.

Summary

Part 702 of the NCUA’s rules implements the risk-based net worth requirement for complex credit unions. Under § 702.103, a complex credit union is a credit union with   $50 million in assets and a RBNW requirement exceeding 6%. A credit union’s

RBNW is calculated by weighing 8 risk portfolios:

  • long-term real estate loans
  • member business loans (MBL) outstanding
  • investments
  • low-risk assets
  • average- risk assets
  • loans sold with recourse
  • unused MBL commitments
  • allowance

The NCUA’s MBL and Commercial Lending Rule limits the aggregate amount of MBLs that a credit union may make to the lesser of 1.75 times the net worth of the credit union or 1.75 times the minimum net worth required to be well capitalized under the Federal Credit Union Act (FCUA). The rule defines MBLs and commercial loans and distinguishes between the two with only MBLs counting toward the regulatory and statutory cap on loans. Note that while all MBLs are commercial loans, not all commercial loans are MBLs.

As part of the federal government’s response to the COVID-19 impact on the economy, the FRB authorized each of the Federal Reserve Banks to participate in the Paycheck Protection Program Lending Facility (PPPL Facility). Under the PPPL Facility, each of the Federal Reserve Banks will extend non-recourse loans to eligible financial institutions to fund PPP loans with the SBA guaranteed PPP loans pledged as collateral for the PPL Facility loans.

The Interim Final Rule

  • PPP loans will risk weighted zero percent – The IFR amends the NCUA’s risk-based net worth rules as discussed above to include the PPP loans in the definition of low-risk assets (#4 above in the RBNW categories). Other low-risk assets include cash on hand, the NCUSIF deposit, and debt instruments guaranteed by the NCUA. Under §702.106(d), low-risk assets receive a 0% risk weight.
  • PPP loans excluded from calculation of total assets – In order to participate in the PPPL Facility, credit unions will have to originate and hold PPP loans on the credit union’s balance sheet. This in turn could potentially subject credit unions to increased regulatory capital requirements. To facilitate use of the PPPL Facility, the IFR excludes PPP loans pledged as collateral to the PPPL Facility from the definition of total assets in §702.2 for purposes of calculating a credit union’s net worth ratio.
  • PPP loans are not “commercial loans” – The interim final rule excludes PPP loans from the definition of “commercial loans” under § 723. Because the PPL loans would not be defined as “commercial loans” they would not be counted for purposes of calculating a credit union’s aggregate MBL cap.

Summary: CFPB Bulletin 2020-02 “Compliance Bulletin and Policy Guidance: Handling of Information and Documents During Mortgage Servicing Transfers”

12 CFR Part 1024

The Consumer Financial Protection Bureau (CFPB)

Prepared by the Legislative and Regulatory Affairs Department

May 2020

The Consumer Financial Protection Bureau (CFPB) is issued this compliance bulletin and policy to provide guidance to residential mortgage servicers regarding the transfer of mortgage loans.

The bulletin became effective on May 1, 2020 and can be access here.

Summary:

The Bureau issued the bulletin to provide guidance to mortgage servicers and sub-servicers considering potential risks to consumers that may arise in connection with transfers of residential mortgage servicing rights.  The bulletin covers (i) transfer-related policies and procedures and (ii) loan information and documents for ensuring accuracy.

In 2014, the Bureau issued CFPB Bulletin 2014-01 that highlighted the Regulation X mortgage servicing rule requirements.  In addition, the bulletin also addressed frequently asked questions; focus areas of Bureau examinations; and other Federal consumer financial laws applicable to servicing transfers. However, the Bureau has noted that it continues to find weaknesses in compliance management systems and violations of Regulation X related to mortgage servicing transfers. The bulletin highlights a number of examples of servicer practices that the Bureau may consider as policies/procedures that are reasonably designed to achieve the objectives of the transfer requirements such as general transfer-related polices/procedures and loan information and documents to be transferred/received.  Additionally, the bulletin’s “Appendix A” provides examples of information and documents grouped by subject area which the Bureau intends to use to assess compliance with Regulation X.

The Bureau does note that during the duration of the National Emergency and (120 days thereafter), it will consider the challenges entities may face as a result of the pandemic, including operational and time constraints related to the transfer, as well as being sensitive to good faith efforts designed to transfer the servicing without adverse impact to consumers. As such, the Bureau intends to focus supervisory feedback for institutions, if needed, on identifying issues, correcting deficiencies, and ensuring appropriate remediation to consumers.

 

 

 

 

 

CFPB Bulletin 2020-01

March 2020

Responsible Business Conduct: Self-Assessing, Self-Reporting, Remediating and Cooperating

In 2013, the Bureau issued a Bulletin that identified several activities that individuals/businesses could engage in that could prevent and minimize harm to consumers, referring to these activities as “responsible conduct.” The Bureau is issuing this updated Bulletin to clarify its approach to responsible conduct and to reiterate the importance of such conduct.

The Bureau’s focus is on building a culture of compliance among entities, in order to minimize the likelihood of a violation of Federal consumer financial law and thereby prevent harm to consumers.  When a violation of law does occur, swift and effective actions taken by an entity to address the violation can minimize resulting harm to consumers.  Specifically, an entity may self-assess its compliance with Federal consumer financial law, self-report to the Bureau when it identifies likely violations, remediate the harm resulting from these likely violations, and cooperate above and beyond what is required by law with any Bureau review or investigation.

The Bureau seeks to encourage responsible conduct.  Accordingly, if an entity meaningfully engages in responsible conduct, the Bureau intends to favorably consider such conduct, along with other relevant factors, in addressing violations of Federal consumer financial law in supervisory and enforcement matters.  The Bureau principally considers four categories of conduct when evaluating whether some form of credit is warranted in an enforcement investigation or supervisory matter: self-assessing, self-reporting, remediating and cooperating.  These categories are discussed in more detail below.

Additionally, other factors the Bureau considers in determining how to resolve violations of Federal consumer financial law include, without limitation, (i) the nature, extent, and severity of the violations identified and any associated consumer harm; (ii) an entity’s demonstrated effectiveness and willingness to address the violations; and (iii) the importance of deterrence, considering the significance and pervasiveness of the potential consumer harm.

Self-Assessing:

This factor, also described as self-monitoring or self-auditing, reflects a proactive commitment by an entity to use resources for the prevention and early detection of violations of Federal consumer financial law. Below is a list of questions the Bureau intends to consider in determining whether to provide favorable consideration for self-assessing activity including:

  • What resources does the entity devote to compliance? How robust/effective is its compliance management system? Is it appropriate for the size and complexity of the entity’s business?
  • Has the entity taken steps to improve its compliance management system when deficiencies have been identified either by itself or external regulators? Did the entity ignore obvious deficiencies in compliance procedures? Does the entity have a culture of compliance?
  • Considering the nature of the violation, did the entity identify the issue? What is the nature of the violation or likely violation and how did it arise? Was the conduct pervasive or an isolated act? How long did it last? Did senior personnel participate in, or turn a blind eye toward, obvious indicia of misconduct?
  • How was the violation detected and who uncovered it? If identified by the entity, how did the entity identify the issue (e.g. from customer complaints, audits or monitoring based on routine risk assessments or whistle blower activity?) Was the identification the result of a robust and effective compliance management system including adequate internal audit, monitoring and compliant review processes? Was identification prompted by an impending exam or an investigation by a regulator?
  • What self-assessment mechanisms were in place to effectively prevent, identify or limit the conduct that occurred, elevate it appropriately, and preserve relevant information? In what ways, if any, were the entity’s self-assessing mechanisms particularly noteworthy and effective?

Self-reporting:

This factor substantially advances the Bureau’s protection of consumers and enhances its mission by reducing the resources it must expend to identify violations and making those resources available for significant matters.  Prompt self-reporting of likely violations also represents concrete evidence of an entity’s commitment to responsibly address the conduct at issue.  Below is a list of questions the Bureau intends to examine in determining whether to provide favorable consideration for self-reporting of likely violations of Federal consumer financial law including:

  • Did the entity completely and effectively disclose the existence of the conduct to the Bureau, to other regulators, and, if applicable, to self-regulatory organizations? Did the entity report any additional related misconduct likely to have occurred?
  • Did the entity report the conduct to the Bureau without unreasonable delay? If it delayed, what justification, if any, existed for the delay? How did the delay affect the preservation of relevant information, the ability of the Bureau to conduct its review or investigation, or the interests of affected consumers?
  • Did the entity proactively self-report, or wait until discovery or disclosure was likely to happen anyway, for example due to impending supervisory activity, public company reporting requirements, the emergence of a whistleblower, consumer complaints or actions, or the conduct of a Bureau investigation?

Remediating:

 When violations of Federal consumer financial law have occurred, the Bureau’s remedial priorities include obtaining full redress for those injured by the violations, ensuring that the entity who violated the law implements measures designed to prevent the violations from recurring, and when appropriate, effectuating changes in the entity’s future conduct for the protection and/or benefit of consumers. Below is a list of questions the Bureau intends to examine in determining whether to provide favorable consideration for remediation activity regarding likely violations of Federal consumer financial law including:

  • What steps did the entity take upon learning of the violation? Did it immediately stop the violation? How long after the violation was uncovered did it take to implement an effective response?
  • What steps did the entity take to discipline the individuals responsible for the violation and to prevent the individuals from repeating the same or similar conduct?
  • Did the entity conduct an analysis to determine the number of affected consumers and the extent to which they were harmed? Were consumers made whole through compensation and other appropriate relief, as applicable? Did affected consumers receive appropriate information related to the violations within a reasonable period of time?
  • What assurances are there that the violation (or a similar violation) is unlikely to recur? Did the entity take measures, such as a root-cause analysis, to ensure that the issues were addressed and resolved in a manner likely to prevent and minimize future violations? Similarly, have the entity’s business practices, policies and procedures changed to remove harmful incentives and encourage proper compliance?

Cooperating:

Cooperating relates to the quality of an entity’s interactions with the Bureau after the Bureau becomes aware of a likely violation of Federal consumer financial law, either through an entity’s self-reporting or the Bureau’s own efforts. Below is a list of questions the Bureau intends to examine in determining whether to provide favorable consideration for cooperating in a Bureau matter including:

  • Did the entity cooperate promptly and completely with the Bureau and other appropriate regulatory and law enforcement bodies? Was that cooperation present throughout the course of the review and/or investigation?
  • Did the entity take proper steps to develop the facts quickly and completely and to fully share its findings with the Bureau? Did it undertake a thorough review of the nature, extent, origins, and consequences of the violation and related behavior? Who conducted the review and did they have a vested interest or bias in the outcome? Were scope limitations placed on the review? If so, why and what were they?
  • Did the entity promptly make available to the Bureau the results of its review and provide sufficient documentation reflecting its response to the situation? Did it provide evidence with sufficient precision and completeness to facilitate, among other things, appropriate actions against others who violated the law? Did the entity produce a complete and thorough written report detailing the findings of its review? Did it voluntarily disclose material information not directly requested by the Bureau or that otherwise might not have been uncovered? Did the entity provide all relevant, non-privileged information and make assertions of privilege in good faith?
  • Did the entity direct its employees to cooperate with the Bureau and make reasonable efforts to secure such cooperation? Did it make the most appropriate person(s) available for interviews, consultation, and/or sworn statements?

The Bureau notes that it intends for this guidance to encourage entities subject to the Bureau’s supervisory and enforcement authority to engage in more “responsible conduct” as defined within the guidance. The bulletin can be found here.

 

 

 

 

NCUA Risk Alert: 20-Risk-01 Cybersecurity Considerations for Remote Work

April 2020

Common cybersecurity risks for remote workers include Malware attacks, Phishing and other social engineering attacks, and Advance Persistent Threat (APT) attacks.

NCUA issued Risk Alert 20-Risk-01 to remind credit unions of the need to ensure that employees working remotely adhere to sound cyber hygiene on their home networks, personal computing devices, and other internet-connected devices. Credit unions must exercise controls over remote work commensurate with the institution’s size and complexity and be prepared to respond to any incidents that may occur.

Preparing Employees to Prevent Security Incidents

Credit unions should be communicating with remote employees to verify that work is being done securely. To minimize the risk of a successful cyber attack on remote employees, credit union policies should address issues such as:

  • Ensuring that family members or others do not use employee’s designated work device and that employees keep devices physically secure;
  • Encrypting sensitive information, using strong encryption options for wireless systems, and implementing session time outs;
  • Ensuring employees are working with a user account and not an administrator or privileged account and establishing strong, unique passwords for all log-ins and devices on the employee’s home network;
  • Leveraging firewall capabilities available through internet service providers;
  • Updating software and removing unnecessary services and software;
  • Ensuring system and account logs are being collected and maintained

Responding to a Security Incident

Credit union policies for remote employees should address actions the employee should take if they suspect a cyber incident and what responses the credit union will take.

Cybersecurity Resources

Additional resources are available at:

NCUA Interim Final Rule: Part 725 Central Liquidity Facility

Prepared by NASCUS Legislative & Regulatory Affairs Department
April 2020

NCUA has published an Interim Final Rule (IFR) making changes to NCUA’s Central Liquidity Facility (CLF). The IFR makes implementing changes pursuant to temporary changes made to the CLF by § 4016 of  HR 748, the CARES Act. The CLF is governed by Title III of the Federal Credit Union Act (FCUA) and Part 725. Both federally and privately insured credit unions may access the CLF.

The CARES Act made 4 changes to Title III that all will sunset on December 31, 2020:

  • Increased the CLF maximum borrowing authority to 16 times stock and surplus
  • Permits corporate credit unions to borrow for their own needs
  • Provides greater flexibility and affordability to corporate credit unions to serve as agents by allowing smaller pools of stock subscription
  • Provides NCUA more flexibility in approving loans by eliminating the limitation on borrowing to expand portfolios

In addition, NCUA’s IFR also made the following 3 changes to the CLF:

  • Eliminated the 6-month waiting period for a new member to receive a loan
  • Expedited credit union’s ability to terminate its membership in the CLF
  • Eased collateral requirements for certain assets securing loans

The Interim Final Rule proposed rule may be read here. Comments are due to NCUA 60 days after publication in the Federal Register. As of April 24, 2020, the rule has not been published in the Federal Register.

Summary

NCUA is making changes to the CLF that will allow corporate credit unions to join the CLF directly in their own right for a temporary period  as well as changing the rules for subscriptions when a corporate credit union acts an agent for its natural person credit union members. The changes related to corporate credit unions will sunset on December 31, 2020. NCUA is also making changes to allow credit union joining the CLF to immediately seek an advance of funds. Currently, a credit union must be subscribed for 6 months before seeking an advance.

  1. Changes Related to Corporate Credit Unions

In accordance with the CARES Act, NCUA is amending the definition of “Liquidity needs” in § 725.2(i) to remove the words “primarily serving natural persons.” This change allows corporate credit unions to access the CLF directly for their own borrowing needs until December 31, 2020. In addition, § 725.17(b)(2) will be amended to make clear that a corporate may apply for a CLF advance for its own liquidity needs.

Should a corporate seek to borrow from the CLF for its own liquidity needs, § 725.4 is being amended to require the corporate subscribe to CLF stock in an amount equal to .5% the corporate’s paid-in and unimpaired capital and surplus.

In addition, NCUA will make cohering changes to Parts 725.18(a) and 725.19(b) to apply to agent loans the same creditworthiness and collateral requirements that currently apply to CLF advances to natural person credit union members.

Once the provision sunsets, a corporate agent may not request any additional CLF advances for its own liquidity needs and must continue to follow the terms of the borrowings outstanding.

NCUA is also changing the subscription requirement for corporate credit unions to act as agent for natural person credit unions. Currently, § 725.4(a)(2) requires the corporate credit union agent to subscribe to the capital stock of the CLF in an amount equal to .5%

of the paid-in and unimpaired capital and surplus of all its natural person credit union members (except those that subscribe to CLF stock directly or have designated another corporate as their agent). Under NCUA’s changes, the NCUA will designate the group of credit unions which are considered covered by the corporate credit union’s agency and that group will serve as the basis for calculating the subscription amount required for purchase. This implements the changes made by the CARES Act to § 1795c(b)(2) of the FCUA. This change also sunsets on December 31, 2020.

Upon the sunset of this modified agent provision, any corporate credit union that became an agent under this provision must, within one-year from the sunset date, either:

  • purchase CLF stock in accordance with the terms of whatever post sunset regulation is implemented; or
  • terminate its membership in the facility

NCUA specifically seeks comment on whether the one-year time frame is sufficient, or whether a longer or shorter timeframe is warranted.

  1. Regular Membership Requirements

NCUA is eliminating the current § 725.3 six-month waiting period on obtaining CLF advances for a credit union that becomes a regular member. Now a credit union that becomes a member of the CLF may immediately seek an advance from the facility.

Under the FCU Act and current § 725.6 a credit union member may terminate its membership in the after a specified notice period based upon the amount of subscription:

 

% of CLF Stock Held by Credit Union

 

 Notice Period
Less than 5% total CLF stock Membership terminates 6 months after giving written notice to NCUA
5% or more of total CLF stock Membership terminates 24 months after giving NCUA written notice

 

NCUA is enacting a temporary change to the waiting periods for terminating CLF membership.

 

The Board is amending the waiting periods for a credit union to terminate its membership in the CLF between publication of the rule in the Federal Register and January 1, 2022. The temporary termination rules will be as follows:

 

Between May 2020 and December 31, 2020

 Any credit union, regardless of its percentage of CLF stock ownership may terminate its membership on the sooner of 6 months written notice or on December 31, 2020
 

Between January 1, 2021 and December 31, 2021

 Any credit union “still a member” on December 31, 2020 may terminate its membership immediately upon notifying NCUA
 

After January 1, 2022

 CLF membership termination will revert to the pre-amendment 6 month and 24 month notice and waiting periods

 

NCUA is also changing the collateral requires for advances from the CLF. NCUA will publish a collateral table on its website. The collateral required will vary based upon the types of assets the member credit union has available to secure the advance. Depending on the types of assets held by a CLF member, this change by NCUA might ease the collateral requirements which in turn might result in a higher borrowing capacity for the credit union seeking an advance.

Currently, § 725.19(a) requires collateralization of 110% of all outstanding advances without regard to the nature of the assets being pledged.

NCUA Proposed Rule: Part 704  Corporate Credit Unions

Prepared by NASCUS Legislative & Regulatory Affairs Department
April 2020

 NCUA is proposing changes to Part 704, the Corporate Credit Union Rule. The rule applies to state-chartered corporate credit unions by reference in Part 741.206. This proposal represents the 4th revision to corporate credit union rules since the economic crisis of 2008.

NCUA’s proposal would:

  • Permit corporate credit unions to make de minimis investments in natural person credit union CUSOs without those CUSOs being regulated as corporate CUSOs
  • Expands the category of senior staff eligible to serve on a corporate’s board
  • Removes experience and independence requirements for the enterprise risk management officer
  • Establishes rules for corporate investment in subordinated debt of natural person credit unions
  • Reduces the time horizon of NII modelling from 2 years to 1 year
  • Create a new Appendix D to the listing all approved corporate CUSO services
  • Clarifies the prohibition against investments in collateralized debt obligations as applying to both loans and debt securities

The proposed rule may be read here. Comments are due to NCUA July 27, 2020.

** Note, the comment period was extended to July 27, 2020 in a subsequent filing.

 Summary

  • NCUA Proposes easing the limitations on corporate credit union CUSO investments

Part 704.11 governs corporate credit union CUSOs. A corporate credit union CUSO is defined as an entity that is 1) at least partly owned by a corporate credit; 2) primarily serves credit unions; 3) restricts its services to those related to the normal course of business of credit unions; and 4) is structured as a corporation, limited liability company, or limited partnership under state law.

There is no exception under § 704 for de minimis investments by a corporate credit union into another entity. If the corporate credit union invests, the entity is a corporate CUSO and must meet the other requirements of Part 704.11.

The proposed rule amends the definition of corporate CUSO to allow a corporate credit union to make a de minimis non-controlling investment in a natural credit union CUSO without the CUSO being deemed a corporate CUSO. NCUA cites several benefits to the credit union system from this rule change:

  • Natural person CUSOs have greater flexibility than corporate CUSOs which may better facilitate innovation, product, and service development
  • Corporate credit union participation in the natural person CUSO pool allows corporates to access innovative development while providing natural person credit unions a larger pool of investors and collaborators

 

  • NCUA will make conforming changes to § 704.2 Definitions and to References in § 704.5, § 704.6, and § 704.7

To recognize that corporate credit unions would be allowed to hold de minimis non-controlling investments in natural person credit union CUSOs, NCUA would expand and revise the CUSO definitions in § 704.2. The proposal defines a “Corporate CUSO” as a CUSO where:

  • a corporate owns 25% of the CUSOs stock or equity
  • the CUSO a consolidated CUSOSO
  • a corporate credit union has the power, directly or indirectly, to direct the CUSO’s management or policies
  • the aggregate corporate credit union ownership meets or exceeds 50% of the CUSO’s contributed equity, stock, or membership interests

NCUA would also add a definition for a “CUSO” to reflect that corporates might invest in a natural person credit union CUSO WITHOUT a controlling interest. Finally, the existing definition of “Consolidated Credit Union Service Organization” would be amended to include any CUSO whether a corporate CUSO or a natural person credit union CUSO.

Rule would replace the term corporate CUSO with CUSO to apply to both corporate and natural person credit union CUSOs for purposes of the credit risk management, investments, and lending provisions of the rule.

 

The proposal would create a new definition for “natural person credit union subordinated debt instrument” referring to any debt instrument issued by a natural person credit union pursuant to such rules for federally insured credit unions.

The proposal would change the defined term “collateralized debt obligation” to “collateralized loan or debt obligation,” to clarify that the prohibition applies to both loans and debt securities.

  • Part 704.11 would be Reorganized

The proposed changes to § 704.11 clarify that certain requirements apply to a corporate credit union’s investment in or lending to both a corporate CUSO and a natural person credit union CUSO while certain requirements apply only to either natural person CUSOs or corporate CUSOs.

Part 704.11(a) would be amended to make clear that the existing aggregate investment and loan limits apply to the aggregate of a corporate’s loans and investments to all CUSOs whether corporate or natural person.

Part 704.11(b) would require corporate credit unions comply with § 723.4 due diligence requirements

Part 704.11(c) would require corporate credit union investments in natural person credit union CUSOs comport to Part 712 as well. NCUA states that the corporate credit union’s investment in a FISCU’s CUSO would also be subject to § 712.

Part § 704.11(e) would designate any subsidiary of a corporate CUSO as a corporate CUSO and apply § 704 to all tiers of a corporate CUSO.

  • Part 704.19 Disclosure of Executive Compensation

Under the proposed rule, § 704.19 would require that the disclosure of certain employees’ compensation include BOTH compensation from a corporate CUSO and a natural person credit union CUSO. However while current § 704.11(g) requires a corporate CUSO to disclose compensation paid to any employees that are also employees of a corporate credit union lending to or investing in the CUSO, natural person credit union CUSOs will not be required under the Corporate Credit Union rule to disclose such information. Corporate credit unions would be responsible for getting this information from a natural person credit union CUSO.

  • Part 704.14 Corporate Credit Union Board Representation

Part 704.14 currently requires credit union representatives on the corporate’s board must hold the position of chief executive officer, chief financial officer, chief operating officer, or treasurer/manager at a member credit union. Under the proposal, NCUA would no longer expressly limit the corporate credit union board to the above stated positions. The proposed rule would require the credit union representative board members by any person in a senior staff position at a member credit union. The rule would list the above positions as examples and add two new positions to the list: chief information officer and chief risk officer.

  • Part 704.21 Enterprise Risk Management

Since 2011 § 704.21 has required corporate credit unions develop and follow an enterprise risk management policy, establish an enterprise risk management committee (ERMC) and include an independent risk management expert on that committee. The current rule included a prescriptive list of qualifications for the risk management expert as well as a requirement the expert be “independent” of the corporate credit union. NCUA no longer believes that it is necessary for prescriptive experience requirements and for the risk management expert to be independent of the corporate credit union. The proposed rule would require the enterprise risk management committee include a risk management expert who can report directly to the board of directors and whose experience is commensurate with the size and complexity of the corporate. In other words, the risk management expert may now be an insider. NCUA will evaluate the adequacy of a corporate credit union’s enterprise risk management practices through the supervisory process.

  • Natural Person Credit Union Subordinated Debt Instruments

Corporate credit unions may purchase subordinated debt instruments of natural person credit unions under a corporate credit union’s lending authority. The proposed rule does not explicitly state that a corporate credit union may purchase a natural person credit union subordinate debt instrument because NCUA believes corporate credit unions’ lending authority is currently sufficiently broad to include purchasing subordinated debt instruments.

Under the proposal, the revised definition of “Tier I Capital” would require corporate credit unions fully deduct the amount of the subordinated debt instrument from its tier 1 capital to ensure consistent treatment between investments in the capital of other corporate credit unions and natural person credit unions.

  • New Appendix D: Approved Corporate CUSO Activities

Current § 704.11 requires that a corporate CUSO agree to limit its services to brokerage services, investment advisory services, and other categories of services as preapproved by NCUA and published on NCUA’s Website. NCUA now proposes replacing the list on the agency’s website with a new Appendix D that would list all approved services and any conditional approvals. NCUA is not making any changes to the list, only republishing the list as part of the rule text.

 

  • Net Interest Income Modeling

 

Under current § 704.8, every quarter, a corporate credit union must perform net interest income (NII) modeling to project earnings in multiple interest rate environments for a period of no less than two years. Corporates are also subject to weighted average life limits for asset maturities of a maximum two years maturity. Because of the overlap of these two requirements, NCUA proposes to only require NII modeling for 1 year instead of two.

  • NCUA’s Request for Comments

NCUA is particularly interested in comments on proposed thresholds and definitions as well as specifically on the following:

  • Is the proposed definition of corporate CUSO appropriate? Does it capture the types of corporate credit union investments most likely to pose systemic risk and is 25% the proper threshold for designating a CUSO a corporate CUSO?
  • How do corporate credit unions structure their investment in CUSOs? Is it generally through stock? Contributed equity? Membership interests? Are there any types of typical ownership interests excluded from the proposed rule?
  • Can Corporates comply with annual disclosure compensation rules without receiving compensation information from the natural person CUSOs?
  • Should the rule prohibit corporate credit union investment is subordinated debt?
  • Is the definition of natural person credit union subordinated debt instrument appropriate?
  • Is the timeframe proposed for NII modeling appropriate?
Letters to Credit Unions 20-CU-09 Temporary Regulatory Relief in Response to the COVID-19 Pandemic

April 2020

NCUA’s guidance reviews actions the agency has taken to provide “temporary regulatory relief” to federally insured credit unions (FICUs) during the COVID-19 crisis. Many of the relief provisions were approved by the NCUA Board during its April meeting.

  • 701.36 FCU Occupancy & Disposal of Acquired Premises [FCU only]

FCUs cannot retain premises that are not being used to conduct credit union business unless they are granted a waiver from NCUA. NCUA has amended the timeframe for calculating the need for such waivers so that delays that fall within the date of the temporary final rule’s publication in the Federal Register and December 31, 2020, will not be counted for purposes of determining a FCU’s compliance with § 701.36(c).

  •  701.23(b) Purchase of Eligible Obligations [Likely FCU only]

Part 701.23(b)(2) permits well-capitalized FCUs with a composite CAMEL rating of 1 or 2 to purchase eligible obligations, without regard to whether they are obligations of its members, from another FICU or a liquidating credit union. NCUA has expanded the eligibility to include composite CAMEL 3 FCUs. NCUA will also allow FCUs to purchase eligible obligations pursuant to § 701.23(b)(1)(i) or § 701.23(b)(2)(i) without regard to whether the purchasing credit union is empowered to grant such loans.

Loans purchased under this broader authority will not count against the § 701.23(b)(4) limit of 5% of the unimpaired capita/surplus. This authority expires on December 31, 2020, at which time any purchases made under this authority will be grandfathered.

For FISCUs, § 701.23(b)(1) is referred to in Part 741.8 as a classification of loans not requiring the pre-approval of the NCUA for purchase. Although NCUA’s rules are a bit ambiguous on this point, it does not appear this affects regulatory relief effects FISCUs.

  • 701.22 Loan Participations [Benefits FISCUs]

NCUA is raising the § 701.22(b)(5) limit of a FICU’s aggregate amount of loan participation purchased from any one originating lender to $5 million or 100% of the credit union’s net worth, unless a waiver is obtained from the NCUA RD. NCUA has temporarily increased the limit, until December 31, 2020,  below which a waiver is not required to the greater of $5 million or 200% of the credit union’s net worth. Part 701.22 applies to FISCUs by reference in § 741.8.

 NCUA notes in its guidance that additional relief available to FICUs includes:

  • Annual Supervisory Committee Audit Reports – In 2019 NCUA eliminated the requirement that annual audits be delivered within 120 days of the end of the year. NCUA will take into account that COVID-19 may delay audit delivery beyond the time established in the retention letter for NCUA mandated audits.
  • Late Call Report Civil Money Penalties – The NCUA will not take action against any credit union for submitting the March 31 Call Report after the respective filing deadline as long as the report is submitted within 30 days of the April 26, 2020, file date. SCUs should contact their state regulators if delayed.
  • Miscellaneous Policy and Review Requirements – NCUA will not take exception to policy changes that are made in the long-term best interests of a credit union and its members or if credit unions may need to make exceptions to their policies to assist members affected by the pandemic.

NASCUS hosted two Legislative and Regulatory Committee calls, featuring attorneys from the Washington law firm Venable LLP on April 10 and April 15.  Questions from state regulators, credit unions, and state leagues related to operating during the COVID-19 crisis were answered.

 

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

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

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

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

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

April 21, 2020 StateFocus State Wage Garnishment Guidance

April 16, 2020 StateFocus: State Paycheck Protection Program Guidance

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

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

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

 

NCUA 2020 Regulatory Review

Prepared by NASCUS Legislative & Regulatory Affairs Department
February 2020

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

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

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

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

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

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

Summary

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

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

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

Prepared by NASCUS Legislative & Regulatory Affairs Department
February 2020

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

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

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

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

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

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

Summary

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

CU Purchased All Bank Assets & Liabilities CU Purchased Some of the Bank Asset and Liabilities (for example branches)  

Bank M&A Activity in the Given Year
2020 9 pending (2/1/20) 8 pending (2/1/20) —-
2019 11 4 179
2018 7 1 249
2017 3 1 261
2016 2 4 247
2015 2 1 284
2014 1 1 303
2013 2 3 252

 

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

 

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

 

The Federal Credit Union Act

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

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

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

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

 Subpart D

Proposed Subpart D would have 5 provisions:

  • Proposed § 708a.401 Definitions

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

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

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

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

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

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

  • Proposed § 708a.402 Approval Required for Combination Transactions

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

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

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

The remaining 2 factors are not safety and soundness related:

 

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

 

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

 

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

 

  • Proposed § 708a.403 Submission to the NCUA

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

 

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

 

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

 

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

 

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

 

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

 

  • 404 Insurance of Deposits

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

 

  • Proposed § 708a.405 Federal Credit Union Membership

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

 

Section 741.8 Purchase of Assets and Assumption of Liabilities

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

 

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

 

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

 

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

-End-

[1] Part 741.208 reads in full:

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

 

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

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

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

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

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

20-RA-01 Other Supervisory Committee Audits

January 2020

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

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

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

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

 

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

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

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