19-RA-02 Serving Hemp Businesses

August 2019

NCUA has issued “interim guidance” for credit unions interested in serving the legalized hemp industry. The guidance will be updated as needed as necessary regulations are issued by the United States Department of Agriculture (USDA) and others regarding the growth, processing, manufacture, and retail sale of hemp. The change in federal law results from the 2018 Farm Bill removing hemp from Schedule I of the Controlled Substances Act (signed into law on December 20, 2018).

Background

The 2018 Farm Bill defines hemp as “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.”
Although hemp is no longer a controlled substance, whether any given hemp crop is being produced legally is a complicated matter involving the 2014 Farm Bill, the 2018 Farm Bill, pending USDA regulations and state law and state regulations.

• As of the date of this publication (August 2019) only industrial hemp produced pursuant to the 2014 Farm Bill is legal (for a good explainer, see here)
• For hemp to be legally produced pursuant to the 2018 Farm Bill, the USDA must issue regulations and guidelines implementing the 2018 Farm Bill hemp provisions (see USDA FAQ on hemp production issued July 2019)
• The USDA has issued a legal opinion interpreting the 2018 Farm Bill and establishing the need for implementing regulations.
• States and Tribal authorities may still prohibit, or more strictly regulate hemp production regardless of the pending USDA regulations, however States and Tribal Authorities may not prohibit the interstate transportation of hemp or hemp products grown or produced pursuant to the 2014 and/or 2018 Farm Bills.

NCUA’s guidance reminds credit unions that in addition to regulations related to hemp production, other hemp-related businesses such as manufacturers, distributors, shippers, and retailers of hemp-derived products, and the products themselves, may be subject to other state and federal laws related to sales, distribution, and medication among others. For example, nothing in the 2018 Farm Bill affected the authority of the

of the Secretary of Health and Human Services or the Commissioner of Food and Drugs to promulgate Federal regulations and guidelines that relate to hemp and foods, medication and public health.

 Considerations for Credit Unions Serving Hemp-Related Businesses

NCUA notes that credit unions choosing to serve the hemp industry should be aware of relevant Federal, State and Indian Tribe laws and regulations that apply to any hemp-related businesses they serve. NCUA also notes the need for any credit union seeking to serve the hemp industry to have a BSA/AML program commensurate with the complexity, and risks, of serving the industry.

NCUA highlights the need for credit unions serving the hemp industry to have the following elements of their BSA/AML programs:

• Appropriate due diligence procedures for hemp-related accounts and for compliance with SAR filing requirements. NCUA states that it is the agency’s understanding that SARs are not required to be filed for the activity of hemp-related businesses operating lawfully, provided the activity is not unusual for that business.
• If serving 2014 Farm Bill hemp-related businesses, a knowledge the states’ laws, regulations, and agreements under which each member/hemp-related business operates, an understanding of how to verify the member is part of the state’s pilot program, and the ability to adapt due diligence and reporting procedures to risks specific to participants in the pilot program(s).
• A familiarity with any other state, federal or Tribal laws and regulations that prohibit, restrict, or otherwise govern these businesses and their activity when deciding whether to serve hemp-related businesses that may already be able to operate lawfully without reliance on forthcoming 2018 Farm Bill rules,

Lending to Hemp-Related Businesses

NCUA states that lending to a lawfully operating hemp-related business is permissible, however must be done in accordance with NCUA rules such Part 723 regulating commercial lending as well as within safe and sound parameters for underwriting and appropriate commercial lending practices.

 

NCUA Risk Alert: 19-Risk-01 Business Email Compromise Fraud

August 2019

 NCUA issued the first Risk Alert of 2019 to remind credit unions of the risks related to Business Email Compromise (BEC) fraud and steps that institutions should consider in order to mitigate the risk of falling prey to such scams.

 

BEC occurs when a criminal uses email to impersonate a legitimate business or person in order to request or access fraudulent payments. Criminals may compromise a victim’s email address or domain through social engineering or use publicly available services to spoof this information.

 

NCUA notes in its Risk Alert that the FBI has created a recovery asset team with a goal to quickly identify and freeze suspicious wire transfers before funds are transferred or removed from a suspect’s account.

 

NCUA provided the following recommendation for steps credit unions can take to mitigate the risk of BEC fraud:

 

• Never make a payment change without verifying the change with the intended recipient
• Verify the accuracy of email addresses when checking mail on a mobile device
• Use a two-step verification process to verify wire requests with members, and use information from previously known email addresses and phone numbers rather than what is provided in the wire transfer request
• Require staff to investigate and verify changes to members’ personal information or business practices of the credit union’s vendors or member business accounts
• Know the routines of members’ wire activity and contact them with any changes or concerns before sending a wire transfer
• Verify transaction details with the recipient bank before sending a suspicious wire transfer
• Use email spam filters to quickly identify potential fraudulent or spoofed emails
• Create rules in the credit union’s intrusion detection system to flag emails with extensions that are similar, but different to, your credit union or members
• Use caution posting information on social media and company websites, especially job duties/descriptions, hierarchal information, and out-of-office details
• Implement multi-factor authentication (MFA) for corporate e-mail accounts that requires at least two pieces of information to login (something a user knows, such as a password, and something a user has, such as a dynamic PIN)

 

Additional self-protection strategies may be found in the Justice Department’s publication “Best Practices for Victim Response and Reporting of Cyber Incidents.”

 NCUA recommends credit unions also consider:

• contact the originating financial institution as soon as possible to request a recall or reversal, as well as a Hold Harmless Letter or Letter of Indemnity
• determine whether a Suspicious Activity Report should be filed with FinCEN (FinCEN has issued an advisory on BEC fraud schemes)

NCUA last issued a Risk Alert in February of 2013 regarding denial of service attacks.

 

Proposed Rule Summary

Accuracy of Advertising & Notice of Insured Status

Prepared by NASCUS Legislative & Regulatory Affairs Department
October 2017

 

NCUA is proposing changes to its Advertising rule, Part 740. This rule applies to federally insured state credit unions (FISCUs) by reference in Part 741.211. NCUA is proposing the addition of a 4th short statement “Insured by NCUA” as well as proposing the expansion of the exemption from the advertising statement requirement regarding radio and television advertisements. NCUA is also proposing the elimination of the requirement to include the official advertising statement on statements of condition required to be published by law.

NCUA also seeks comments on whether Part 740 should be modified to accommodate new trends in advertising such as social media, texting, and mobile banking applications.

NCUA’s proposed rule may be read here. The proposed rule is open for comment until December 4, 2017.

Summary
NCUA’s advertising rule requires each federally insured credit union (FICU) to display NCUA’s official sign.

The rule also provides FICUs three options
when advertising:

• FICUs may include the statement ‘‘This credit union is federally insured by the National Credit Union Administration.’’
• FICUs may also use the shorter version ‘‘Federally insured by the NCUA.’’
• As a third option, the official sign may be displayed in advertisements in lieu of the advertising statement.

Part 740.5(c) exempts several kinds of advertisements from the requirement to use of the above 3 advertising statements:

• Radio advertisements that are less than 15 seconds in duration
• television advertisements that are less than 15 seconds in duration

NCUA notes that these exemptions are less robust than FDIC’s for banks, which exempt bank radio and television ads of 30 seconds or less. NCUA also currently requires the official advertising statement on statements of condition required to be published by law. FDIC does not.

NCUA now proposes:

• creating a 4th short statement for the official advertising statement, “Insured by NCUA”
• Extending the exemption from the official statement to radio or TV advertisements of 30 seconds or less
• Eliminating the requirement that the official advertising statement be included in required reports of condition

NCUA also seeks comments on whether its advertising rules should be modified to facilitate the trend in advertising via new types of social media, mobile banking, text messaging and other digital communication platforms, including Twitter and Instagram.

NASCUS note:

NCUA addressed “risks” with social media in a joint guidance with other federal bank regulators released in 2013.

NCUA Board Action

Closing the TCCUSF & Setting the Normal Operating Level

Prepared by NASCUS Legislative & Regulatory Affairs Department
October 2017

The NCUA Board has voted to close the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) in 2017, ahead of its scheduled closing date of June 2021. In conjunction with the closure of the TCCUSF, and the merging of the assets and liabilities of the TCCUSF with the National Credit Union Share Insurance Fund (NCUSIF), the NCUA Board has also voted to raise the normal operating level (NOL) of the NCUSIF to 1.39%. NCUA also established a new process for establishing the NOL in the future, including a notice and comment for changes of 1 basis point or greater.

This action begins the process by which credit unions can begin receiving distribution of the excess monies currently accumulated by the TCCUSF.

NOTE: NCUA did not resolve the methodology by which it would distribute the excess funds to credit unions. Until this issue is resolved, it is unknown how much money each individual credit union will receive.

The notice of the NCUA Board action may be read here.

NCUA received 663 comments on the request for comments.

Summary

When creating the TCCUSF, Congress specified that it would terminate 90 days after the seven-year anniversary of its first borrowing from the U.S. Treasury.  The first borrowing occurred on June 25, 2009, therefore the original closing date of the TCCUSF was September 27, 2016. However, in 2010 NCUA and the Treasury agreed to extend the closing date to June 2021.

NCUA notes that currently, the NCUSIF has a balance of $13.2 billion, which exceeds both the corporate credit union Legacy Asset balance and NGN balance. As of June, 2017, the TCCUSF has a positive net position of $2 billion. That combination of financials increased NCUA’s comfort level with merging the two funds.

The current NOL for the NCUSIF was 1.3% prior to this NCUA Board action. However, in conjunction with merging the TCCUSF and NCUSIF, NCUA determined that it would raise the NOL of the NCUSIF to 1.39%.  NCUA justifies this increase by noting it modelled various economic downturns to estimate the range of potential NCUSIF exposures and concluded that to withstand a moderate recession without the equity ratio falling below the statutory minimum of 1.2% the NCUSIF’s equity ratio needs to be high enough to withstand the following:

• A 13-basis-point decline in the equity ratio due to the impact on the three primary drivers of the Insurance Fund’s performance.
• A 4-basis-point decline in the value of the Insurance Fund’s claim on the corporate credit union asset management estates.
• A 2-basis-point decline in the equity ratio expected to occur prior to when the remaining NGNs begin to mature in 2020 and remaining exposure to the Legacy Assets can begin to be reduced.

Future Review of the NOL (NCUSIF Equity Ratio)

NCUA is adopting the following policy to set the Normal Operating Level of the NCUSIF in the future. Periodically, NCUA will review the equity needs of the NCUSIF and provide an analysis to stakeholders. If NCUA determines a need to change the NOL by more than 1 basis point, it shall publish a request for comments.

NCUA’s goals in setting the NCUSIF Operating Level shall be:

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

Miscellaneous Facts

NCUA’s notice of the Board’s decision to close the TCCUSF in 2017 contained some interesting miscellaneous facts contained in the discussion of the comments received.

• Since 2009, there have been 21 new federally insured credit unions (either new charters or privately insured credit unions that converted to NCUSIF)
• 17 of those 21 credit union filed call reports in the 2nd quarter of 2017
• In 2011, 2012, and 2013 the NCUSIF made distributions to the TCCUSF of $278.6 million, $88.1million, and $95.3million, respectively.
• The TCCUSF has collected $3 billion from legal recoveries and asset sales
• The Wescorp estate is unlikely to ever be able to repay the TCCUSF or the NCUSIF
• During the recession, the NCUSIF charged 2 premiums, 10.3 basis points in 2009 and 12.4 basis points in 2010, together totaling $1.7 billion

Final Rule Summary

Supervisory Review Committee

Prepared by NASCUS Legislative & Regulatory Affairs Department
November 2017

NCUA has finalized new regulations governing procedures for appealing material supervisory determinations to the NCUA’s Supervisory Review Committee (SRC). The new rule, Part 746 Subpart A, applies to federally insured state chartered credit unions (FISCUs) although there is no cross reference in Part 741.

NCUA’s new rules for the SRC review create a rotating pool of SRC members, formalizes the hearing process, provides for an interim review before an SRC appeal, and allows for appeal of the SRC decision to the NCUA Board.

When the rule becomes effective in January, 2018, NCUA’s current SRC governing document, Interpretive Ruling and Policy Statement 12-1 will be withdrawn.

The Supervisory Review Committee final rule may be read here. The rule becomes effective January 1, 2018.

Summary

NCUA and the federal banking agencies were directed by the Riegle Community Development and Regulatory Improvement Act of 1994 to establish appeals procedures for the review of ‘‘material supervisory determinations’’ made by the agencies. In 1995 NCUA issued its first Interpretive Ruling and Policy Statement (IRPS) setting out its appeals procedures for the review of material supervisory determinations. Prior to the publication of this current final rule, the latest iteration of NCUA’s SRC process was governed by IRPS 11-1 and IRPS 12-1.

The new final rule and SRC process has expanded the number of material supervisory determinations made by NCUA that are appealable to the SRC and provided FICUs with an opportunity to seek review by the Director of E&I. To accommodate the increased workload of the SRC, NCUA has increased the size of the SRC to include a rotating pool of at least eight NCUA senior staff.

Under the new SRC rules, a federally insure credit union (FICU) may appeal a material supervisory determinations made by NCUA staff to the SRC, and then possibly to the NCUA Board. “Material supervisory determination’’ means a written decision by a NCUA program office that may significantly affect the capital, earnings, operating flexibility, or that may otherwise affect the nature or level of supervisory oversight of an insured credit union. This includes:

• A composite examination rating of 3, 4, or 5
• A determination relating to the adequacy of loan loss reserve provisions
• The classification of loans and other assets
• A determination regarding a FICU’s consumer protection compliance
• A determination on a waiver request or an application for additional authority

A FICU may not use the SRC process to appeal:

• Determinations for which an independent right to appeal exists such as a decision to appoint a conservator or liquidating agent; or
• A decision to take prompt corrective action pursuant to section 216 of the FCUA
• Enforcement actions and decisions
• A composite examination rating of 1 or 2
• A component rating unless the component rating has a significant adverse effect on the nature or level of supervisory oversight of a FICU
• The scope and timing of supervisory contacts
• Preliminary exam conclusions communicated to the FICU before the final exam is issued
• Formal and informal rulemakings pursuant to the APA

Standard of Review, Discovery, and Dismissal

At each phase of review, each reviewing authority shall make an independent decision regarding whether the material supervisory determination that is being appealed was appropriate. The reviewing authority shall give no deference to the legal or factual conclusions of the program office or a subordinate reviewing authority. However, throughout the process, the burden of proof lies with the FICU.  A decision by the reviewing authority shall be based exclusively on the administrative record consisting of all written submissions by a FICU and a program office, decisions by subordinate reviewing authorities, and transcripts of the oral hearing before the SRC (if oral hearing held).

No part of the rule is intended to create any right to discovery or similar process.

An appeal may be dismissed by written notice if:

• it is not timely filed
• the basis for the appeal is not discernable
• the FICU asks to withdraw the request in writing
• the FICU fails to provide additional information as requested pursuant to the rule
• the FICU engages in bad faith
• the FICU fails to state a material supervisory determination to be appealed

Supervisory and Enforcement Actions

Nothing in the SRC rules is intended to affect, delay, or impede any formal or informal supervisory or enforcement action in progress or affect NCUA’s authority to take any supervisory or enforcement action against an insured credit union.

State Supervisory Authority (SSA)

For appeals where consultation with the appropriate SSA is required, the administrative record shall also consist of any written submissions by the SSA.

Filing an Appeal to the SRC

Before filing an appeal to the SRC, or requesting review by the director of E&I, a FICU must make a written request for reconsideration from the appropriate program office that issued/made the material determination to which the FICU objects. The written request must be made within 30 calendar days after receiving an examination report containing the subject to be appealed and must include:

• A statement of the facts on which the request for reconsideration is based
• A statement of the basis for the material supervisory determination to which the FICU objects and the alleged error in such determination
• Any other evidence relied upon by the FICU that was not previously provided to the appropriate program office making the material supervisory determination

The NCUA program office has 30 calendar days after receiving the FICU request for reconsideration to issue a written decision, stating the reasons for the decision, and providing notice of the FICU’s right to file a request for review by the Director of E&I or file an appeal with the SRC. If a written decision is not issued within 30 calendar days, the request for reconsideration will be deemed to have been denied.

• Review by Director of E&I – After receiving the written decision from the Program Office Prior, a FICU has the option to request the Director of E&I to review the matter before the FICU files an official appeal to the SRC. The FICU has 30 calendar days to make this request (in writing). In addition to containing the basis for the request for review, the written request must contain a certification that the FICU’s board of directors authorized the request for review to be filed.

In reviewing the matter, the Director of E&I has 15 days from receipt of the request to ask for additional information from the appropriate program office or the FICU. Any party asked for additional information has 15 days to respond. The Director of E&I generally has 30 days to render a decision (the deadline is extended if additional information is sought).

If the Director of E&I finds against the FICU, or if the FICU had decided to skip the E&I review, the FICU may file an appeal to the SRC. The FICU has 30 days from the triggering event (rejected reconsideration or rejected/negative E&I review) to file the written request of appeal to the SRC. The request is filed with the Secretary of the NCUA Board and must include:

• A statement that the FICU is filing an appeal with the SRC
• A statement of the facts on which the appeal is based
• A statement of the basis for the determination to which the FICU objects and the alleged error in such determination
• Any other evidence relied upon by the FICU that was not previously provided to the appropriate program office or, if applicable, the Director of the Office of Examination and Insurance
• A certification that the FICU’s board has authorized the appeal to be filed

The SRC Hearing of an Appeal

An appeal to the SRC will be governed by the following procedures:

• The SRC may request additional information from either of the parties within 15 calendar days after the filing of an appeal (and parties have 15 days to submit the materials)
• Unless the FICU requests an all written hearing, the SRC will hear oral presentations from the parties at NCUA headquarters. During an oral hearing, the FICU presents first and each side will be given equal amount of time (some of which may be reserved for rebuttal).
• The FICU may choose any 2 individuals to represent it at the oral presentation to the SRC
• The SRC will issue decisions in writing within 30 calendar days after the oral presentation of the appeal or 30 calendar days from receipt of the request of appeal if the FICU chose to have the appeal decided solely on the written record
• The SRC shall publish its decisions on NCUA’s Web site with appropriate redactions to protect confidential or exempt information. Previously published decisions may be cited as precedent in future appeals.
• If need be, the SRC may consult with E&I or the Office of General Counsel if the matter on appeal involves legal or policy interpretations

Composition of Supervisory Review Committee

The NCUA Chairman will select at least eight NCUA senior staff to comprise the SRC pool, not to include Regional Directors, Associate Regional Directors, the Executive Director, the Deputy Executive Director, the General Counsel, the Director of the Office of Examination and Insurance, or a senior policy advisor or chief of staff to a Board Member. From this pool, three members will be chosen to hear any given appeal. A Special Counsel named by the NCUA General Counsel shall serve as a permanent nonvoting member of the SRC to advise the SRC on procedural and legal matters.

Appeal to the NCUA Board

If the SRC finds against the FICU, the FICU may request an appeal to the NCUA Board. The FICU has 30 days to request an appeal to the NCUA Board. At least 1 NCUA Board member must agree to hear the appeal in order for the Board to accept the appeal.

A FICU’s written request for an appeal to the NCUA Board must include:

• A statement of the facts on which the appeal is based
• A statement of the determination to which the FICU objects and the alleged error in such determination
• A certification that the FICU’s board of directors has authorized the appeal

When submitting its written request for an appeal of an SRC determination to the NCUA Board, the FICU may also request an oral hearing before the Board. The request for an oral hearing must should good cause for an oral hearing and state why the appeal may not be presented adequately in writing. If the request is granted, the hearing will take place at NCUA.

After considering the record, the oral presentations (if requested and granted) and any other information requested to be submitted to the NCUA Board, the NCUA Board will issue a decision within 90 days. Decisions on appeals will be published on the NCUA website pursuant to the same protocols as discussed above for publication of SRC decisions.

State Regulators

The NCUA SRC appeal process applies only to NCUA material supervisory determinations. It does not include determinations/actions of state regulatory agencies. If a supervisory determination that is subject to a request for review or appeal pursuant to these procedures is the product of a joint NCUA/state determination, NCUA will immediately notify the state regulator (providing copies of all relevant materials and the request for review) and solicit the state regulator’s views regarding the merits of the appeal.

Any NCUA determination on review/appeal affects only the NCUA’s actions. NCUA will notify the state regulator of its decision with respect to NCUA’s involvement in the determination and leave the FICU and state to resolve issues between them.

Summary: NCUA Final Rule, Corporate Credit Unions

Prepared by the NASCUS Legislative and Regulatory Affairs Department
November 2017

NCUA has amended provisions in its Corporate Credit Union rule, Part 704, related to retained earnings and Tier I capital. The changes, supported by NASCUS, include:

• amending the definition of ‘‘retained earnings’’ to incorporate ‘‘GAAP equity acquired in a merger’’
• allowing the inclusion of all PCC in capital calculations upon a corporates reaching 250 basis points of retained earnings
• adding a retained earnings threshold to the expanded authorities provisions

The Corporate Credit Union final rule may be read here. The rule becomes effective December 22, 2017.

Summary

In response to the corporate crisis during the recession, NCUA took steps to curtail corporate credit union activities to reduce risk to the natural person credit union system. Among the rule changes implemented in 2010, NCUA set investment concentration limits, limited asset maturities, and prohibited investments in subordinated and private label mortgage-backed securities. The 2010 rule also implemented a prompt corrective action (PCA) regime stipulating capital adequacy for corporates.

NCUA has now amended the corporate credit union rule again to provide corporate credit unions more flexibility in calculating Tier 1 capital. The final rule:

• Incorporates ‘‘GAAP equity acquired in a merger’’ as a component of retained earnings;
• Permits corporates to include all PCC  sourced from an entity not federally insured in its Tier 1 capital once a corporate achieves a retained earnings ratio of 250 basis points
• Adds a definition of “retained earnings ratio” to mean ‘‘the corporate credit union’s retained earnings divided by its moving daily average of net assets;’’

The NCUA did tighten the expanded authorities section of Appendix B of the corporate rule by adding a retained earnings ratio requirement in addition to the existing leverage ratios.

Summary: Part 746 — Appeals

Prepared by the NASCUS Legislative and Regulatory Affairs Department
November 2017

NCUA has promulgated a new final rule to establish procedures to govern appeals to the NCUA Board. The rule establishes a uniform procedure that will apply to agency regulations that currently have their own embedded appeals provisions.

The Appeals final rule may be read here. The rule became effective January 1, 2018.

Summary

Part 746 subpart B Appeals process applies to the following NCUA rules:

• § 701.14 Change in official or senior executive officer in credit unions that are newly chartered or are in troubled condition
• § 701.21 Loans to members and lines of credit to members
• § 701.22 Loan participations
• § 701.23 Purchase, sale, and pledge of eligible obligations
• § 701.32 Payment on shares by public units and nonmembers
• § 701.34 Designation of low income status; Acceptance of secondary capital accounts by low-income designated credit unions
• Chartering applications
• Merger, FOM expansion and spinoff requests
• Underserved area request
• Requests to convert to state or federal charter
• Requests for expanded investment authority (FCUs)
• § 705 requests for loans or technical assistance grants
• § 709 certain claims in liquidation
• § 741 – NCUA revocation of approval of foreign branch
• §750.6 Golden parachutes

Part 746 Subpart B, Appeals Procedure

Upon receiving an adverse determination on a qualifying issue from NCUA, the credit union or credit union professional has 30 days to request a reconsideration from the issuing NCUA program office. The request for reconsideration, which must be in writing, should contain:

• A statement of the facts on which the request for reconsideration is based
• A statement of the basis for the initial agency determination to which the petitioner objects and the alleged error in such determination
• Any other support or evidence relied upon by the petitioner which was not previously provided to the appropriate program office.

The program office will review its decision, taking into consideration the existing facts and any new information provided in the written request for reconsideration. The program office has 30 days to render a decision. The decision will be in writing and will state the reasons for the decision. The burden of “proof” for reconsideration lies with the credit union/petitioner seeking the review by the program office.

If the program stands by the initial decision, or if the credit union/petitioner demurs on seeking the program office reconsideration, then the credit union petitioner may seek an appeal to the NCUA Board. The written appeal to the NCUA Board

Any appeal filed with the Board must include:

• A statement of the underlying facts of the appeal
• Copies of all pertinent documents, records, and materials that support the appeal
• Petitioner statement outlining why the petitioner objects to the initial agency determination and identifying any alleged errors made by the program office
• Any other materials or evidence relied upon by the petitioner that were not provided to the appropriate program office

The burden of proof in an appeal to the NCUA Board rests with the petitioner. A petitioner has 45 days from submission of an appeal to submit amendments to the appeal or additional information.

At the time petitioner requests an appeal, the petitioner may request an oral hearing before the NCUA Board. Should petitioner seek an oral hearing, that request must be submitted in writing at the same time as request for appeal, but in a separate document. Decision to grant an oral hearing is the discretion of the Board.

Once the appeal is received by the NCUA Board, it will be reviewed by an attorney from general Counsel’s office designated as the “Special Counsel” to determine whether conformance with the rules governing appeals. The Special Counsel will also contact the Program Office to request copies of all relevant materials and conduct a review of those materials as well as the petitioner’s materials in order to make a recommendation to the NCUA Board.

The Board will render its decision within 90 days of the original receipt of the request for appeal from petitioner.

The new rule does not apply to:

• Formal enforcement actions
• Creditor claims in liquidation
• Material supervisory determinations within the jurisdiction of the SRC
• Challenges to actions imposed under PCA
• Appeals of matters that are delegated by rule to an officer/position below the Board for final, binding agency action

NCUA will consider including information on Appeals in its Annual Report. In the meantime, NCUA will continue to publish information regarding Appeals on the NCUA website.

NCUA will provide copies of all Appeal related correspondence to SSAs.

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.