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Post Exam Survey Samples: All links/PDFs below are password protected/required for opening: June03RegMtg
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NASCUS Report Article:
Pilot seeks FCU input on pre-, post-exam requirements
(Sept. 17, 2021) Input from federal credit unions (FCUs) on NCUA’s pre-examination, reporting, and post-examination requirements will be collected through a survey pilot set to launch early next week and administered by the agency’s ombudsman, the agency said in a letter this week. this week.
In the Letter to Federal Credit Unions (LTFCU), NCUA said the survey will allow FCUs to provide timely feedback to the agency while helping to standardize the feedback process. The program is being conducted with FCUs that volunteer to participate; the letter does not apply to federally insured, state-chartered credit unions (FISCUs).
During the pilot, set to run from Sept. 20 through March 31 of next year, FCU CEOs or managers will receive a link to the post-examination survey from the NCUA’s Ombudsman at the conclusion of a regular examination, the agency said. FCUs will have 15 days to submit responses. There will be no survey at the conclusion of a follow-up examination or supervision contact, and credit unions are not required to respond to the survey, it said.
NCUA Resource: Post-Examination Survey Pilot
To: Federal Credit Unions
Subject: Examination Program
Status: Active
Dear Boards of Directors and Chief Executive Officers:
The NCUA is piloting a new post-examination survey that will allow credit unions to provide timely feedback to the agency while helping to standardize the feedback process.1 Credit union feedback helps the NCUA evaluate the effectiveness of our examination processes, and also improves communication with credit unions.
Credit Union Participation
Beginning September 20, 2021, through March 31, 2022, federal credit union managers or CEOs will receive a link to the post-examination survey from the NCUA’s Ombudsman at the conclusion of a regular examination. Credit unions will have 15 days to submit responses. The survey will not be sent at the conclusion of a follow-up examination or supervision contact. Credit unions are not required to respond to the survey. Participation is optional.
The Ombudsman will administer the collection of survey responses to maintain separation of the survey responses from NCUA staff conducting examination work.2 The Ombudsman is responsible for reviewing survey responses, consolidating data from responses, and reporting the results to NCUA leadership. Survey responses will be collected through SurveyMonkey and will generally not be used to evaluate the results of individual examinations.
21-RA-10 2022 Truth in Lending (Regulation Z) Annual Threshold Adjustments (Credit Cards, HOEPA, and Qualified Mortgages)
December 2021
The CFPB has published its Truth in Lending (Regulation Z) Annual Threshold Adjustments (for credit cards, HOEPA, & QM). The thresholds adjustments are based on the annual percentage change reflected in the Consumer Price Index (CPI) in effect June 1, 2021. The adjusted thresholds are effective January 1, 2022.
Credit card/Open-end Annual Adjustments
- Minimum Interest Charge Disclosure – For all open-end consumer credit plans under the TILA, the threshold to disclose minimum interest charges will remain unchanged at $1.00.
- Safe Harbor Penalty Fees – For open-end consumer credit plans under the CARD Act amendments to TILA (§ 1026.52(b)(1)(ii)(A)), the adjusted dollar amount for the safe harbor for a first violation penalty fee will increase to $30 for the year 2022. The adjusted dollar amount for the safe harbor for a subsequent violation penalty fee (§ 1026.52(b)(1)(ii)(B)) will increase to $41 for the year 2022.
HOEPA Adjustments
- HOEPA – For HOEPA loans, the adjusted total loan amount threshold for high-cost mortgages for the year 2022 will be $22,969, an increase from $22,052 in 2021. The adjusted points and fees dollar trigger for high-cost mortgages (§ 1026.32(a)(1)(ii)(B)) for the year 2022 will be $1,148, an increase from $1,103 in 2021.
Qualified Mortgages – To determine consumers’ ability to repay mortgage loans, the maximum thresholds for total points and fees for qualified mortgages in 2022 will be:
Qualified Mortgage Amounts
| Reg Z Provision | 2022 Amounts | 2021 Amounts |
|---|---|---|
| 3% of total loan amount for loan amount > $100,000 | Greater than or equal to $114,847 | Greater than or equal to $110,260 |
| $3,000 for a loan amount greater than or equal to $60,000 but less than $100,000 | $3,445 for loans greater than or equal to $68,908 but less than $114,847 | $3,308 for loans greater than or equal to $66,156 but less than $110,260 |
| 5% of total loan amount for loans greater than or equal to $20,000 but less than $60,000 | 5% for loans greater than or equal to $22,969 but less than $68,908 | 5% for loans greater than or equal to $22,052 but less than $66,156 |
| $1,000 for a loan amount greater than or equal to $12,500 but less than $20,000 | $1,148 for loans greater than or equal to $14,356 but less than $22,969 | $1,103 for loans greater than or equal to $13,783 but less than $22,052 |
| 8% of the total loan amount for loans less than $12,500 | 8% for loans less than $14,356 | 8% for loans less than $13,783 |
Summary
On October 21, 2021, the Consumer Financial Protection Bureau (CFPB) ordered six large technology companies operating payment systems in the US to provide information about certain of their business practices. The information will help the CFPB better understand how these firms use personal payments data and manage data access to users so the Bureau can ensure adequate consumer protection.
The Bureau invites any interested parties, including consumers, small businesses, advocates, financial institutions, investors and experts in privacy, technology, and national security to submit comments to inform the agency’s inquiry.
Comments must be received by December 6, 2021. The notice and comment request can be found here.
Congress has tasked the Bureau with ensuring that markets for consumer financial products and services are fair, transparent and competitive. It has authorized the Bureau to require participants in the marketplace to provide information that helps the Bureau monitor risks to consumers and to publish aggregated findings that are in the public interest. Little is known publicly about how Big Tech companies will exploit their payment platforms. As a result, the Bureau has published the October 21, 2021 statement from Director Chopra within this notice and is asking for comment on the statement as well as the questions posed within.
The full statement can be accessed via the link to the notice provided above and the questions posed are found below:
- Will big tech companies engage in invasive financial surveillance and combine the data they collect on consumers with their geolocation and browsing data?
- Will they in turn use this data to deepen behavioral advertising, engage in price discrimination, or sell to third parties?
- Will these companies operate their payment platforms in a manner that interferes with fair, transparent, and competitive markets?
- Will the payment platforms be truly neutral, or will they use their scale to extract rents from market participants?
- Will small businesses feel coerced into participating in the payment platforms out of fear of being suppressed or hidden in search or product listings? If these tech companies enter a market that competes with other providers on the platform, will these providers be removed or otherwise disadvantaged?
- What factors will these tech companies use when disqualifying or delisting an individual or business from participating on the platform?
- How will these payment platforms ensure that key consumer protections are adhered to?
- How effectively do they manage complaints, disputes and errors?
- Are they sufficiently staffed to ensure adequate steps are taken to address consumer protection and provide responsive customer service when things go wrong?
The Bureau’s inquiry will help to inform regulators and policymakers about the future of our payments system. It will also yield insights that may help the Bureau to implement other statutory responsibilities, including any potential rulemaking under Section 1033 of the Dodd Frank Act.
How to get started: Select the dropdown preferences based on the section topic and the state(s) of interest, then press “search.” Once the results pop up, use the “export” or “print” features on the right side to save your search findings.
DISCLAIMER
The NASCUS State System Profile is an online open-content collaborative database; that is, a voluntary association of individuals and groups working to develop a resource of state supervisory information. The structure of this project allows for approved state-specific supervisory editors to alter its content. Please be advised that data found here has not been peer-reviewed by NASCUS staff. That is not to say that you won’t find this to be a valuable and accurate source of information. However, NASCUS cannot guarantee the validity of the information found here. Copyright 2022 National Association of State Credit Union Supervisors (NASCUS)
LTCU: (21-CU-13) Subordinated Debt Final Rule Effective January 1, 2022
November 2021
NCUA’s LTCU was issued to reminder to FICUs that the final subordinated debt rule (NASCUS summary here) becomes effective on January 1, 2022. The final rule amends various parts of the NCUA ’s regulations to permit low-income designated credit unions, complex credit unions, and new credit unions to issue subordinated debt for purposes of regulatory capital treatment.
For low-income designated credit unions (LICUs) any secondary capital issuances occurring after January 1, 2022, will be subject to the requirements of the final rule including re-approval pursuant to the subordinated debt rule.
NCUA is considering a rule change that would allow LICUs to issue secondary capital under a plan approved in 2021, irrespective of the date of issuance, provided such issuances are to the United States government or one of its subdivisions. NCUA will likely finalize this rule change before December 31, 2021.
NCUA recommends LICUs planning on submitting a secondary capital plan to take advantage of the current rules do so as soon as possible given the 45-day review period. LICUs may also wish to consider submitting plans pursuant to the subordinated debt rules taking effect on January 1, 2022 to avoid having to resubmit a plan if their submission is not approved prior to that date.
LTCU 21-CU-12 Internal Revenue Service’s Volunteer Income Tax Assistance Program Collaboration Opportunities
November 2021
Credit unions have until November 15, 2021, to contact the Internal Revenue Service (IRS) to inquire about participating in the IRS’ Volunteer Income Tax Assistance (VITA) program ([email protected]).
The VITA program provides education for consumers on refundable credits, such as the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC). Credit unions may participate in the VITA program by:
- Promoting the VITA program and eligibility requirements through social media, member statements, and/or hosting links to the VITA Locator Tool, and/or the IRS Free File;
- Providing space and equipment at credit union facilities for members to prepare their own tax returns; and
- Hosting IRS-certified volunteers onsite at the credit union to assist members.
NCUA notes that for credit unions, the benefits of participating in the VITA program include:
- Potential to attract new members,
- Asset and wealth building opportunities for members,
- Greater financial education and financial stability among members,
- Opportunities to partner with other community-based organizations,
- Increased membership benefit offerings/potential increased membership loyalty,
- Continuing professional education credits for qualified VITA-trained volunteers,
- Free income tax preparation software or online access for credit unions and their members.
Credit union interested in participating in VITA program can learn more about the program at IRS Partner and Resource Center and Volunteer Site Coordinator Handbook. Interested credit unions should review their operations and strategic plans to determine if the program is a good fit that credit union. Grants and other funding resources are available from NCUA and IRS.
Final Rule Summary: FCU CUSOs (Parts 712)
October 2021
Prepared by NASCUS Legislative & Regulatory Affairs Department
NCUA has issued a final rule related to federal credit union (FCU) credit union service organizations (CUSOs). NCUA’s final rule expands the list of permissible activities and services for CUSOs to include the origination of any type of loan that a FCU may originate and grants NCUA additional flexibility to approve permissible activities and services.
NCUA had also solicited comments in the proposed rule about whether to allow FCUs to invest in certain non-CUSO entities. NASCUS supported so doing, and NCUA noted NASCUS’s recommendation to allow FCUs to invest in certain federally insured state credit union (FISCU) CUSOs without those CUSOs then being subject to NCUA’s CUSO rule’s permissible activities provisions (those provisions do not currently apply to FISCU CUSOs). While not included in this final rule, NCUA did note it would consider that change at a later date.
The CUSO final rule may be read here. The rule becomes effective November 26, 2021.
The NCUA Board vote to approve the rule was a 2-1 vote. Competing views of the proposal are reflected in the enclosed statements by NCUA Chairman Harper (opposed) and NCUA Board member Hood (in favor).
Summary
- FCU CUSOs may now originate any type of loan that an FCU may originate.
NCUA will now permit FCU CUSOs to originate any type of loan that an FCU may originate. Prior to this rule change, FCU CUSOs were only permitted to make business, consumer mortgage, student, and credit card loans. NCUA limited FCU CUSO lending for the following reasons:
- FCU CUSOs may serve customers who are not members of a credit union and NCUA was concerned FCUs would then be profiting from non-members.
- NCUA believed if the FCU CUSO was making member loans, NCUA would have a duty to examine those loans.
- NCUA believed permitting FCU CUSOs to engage in a core credit union function could negatively affect affiliated credit union services.
NCUA cites the following mitigating factors for lifting the previous limitations:
- Although NCUA lacks 3rd party authority, FCUs may only lend or invest 1% of their paid-in and unimpaired capital and surplus, into their CUSOs (aggregate).
- Part 712.3(d) requires all FICUs that own CUSOs to stipulate by contract that NCUA has access to the CUSOs books and records.
- NCUA has broad investigative subpoena authority that agency staff can use to obtain records and testimony in certain extraordinary circumstances if needed.
- That most FCU CUSO loans are sold to FICUs which in turn are subject to examination and enforcement.
- The fact that 72% of natural person credit union CUSOs are wholly owned giving NCUA leverage over the FICU owner.
In addition to permitting a FCU CUSO to originate any type of a loan a FCU may make, FCU CUSOs are now permitted to purchase, sell, and hold any type of loan permissible for FCUs to purchase, sell, and hold. Under the final rule, FCU CUSO originated loans are not subject to the same restrictions as loans originated by FCUs. However, an FCU may not purchase a loan from a CUSO unless the loan meets the requirements of the NCUA’s eligible obligations rule. Similarly, an FCU may not purchase a loan participation from a CUSO unless it complies with the NCUA’s loan participations rule
With respect to loan participations, the final rule permits FCU CUSOs to purchase and sell only participation interests that are permissible for FCUs to purchase and sell.
- All FCU CUSO loan originations are now considered complex or high risk and subject to the enhanced reporting requirements pursuant to the CUSO registry.
Under the current CUSO rule, a CUSO must submit an annual report to NCUA for inclusion in the CUSO registry. CUSOs that are engaged in complex or high-risk activities have enhanced reporting obligations for the registry. Pursuant to § 712.3(d)(4) complex or high-risk CUSOs must agree to include in their report:
- A list of services provided to certain credit unions;
- the investment amount, loan amount, or level of activity of certain credit unions;
- the CUSO’s most recent year-end audited financial statements;
- the total dollar amount of loans outstanding;
- the total number of loans outstanding;
- the total dollar amount of loans granted year-to-date; and
- the total number of loans granted year-to-date.
NCUA will now classify all lending by CUSOs as complex/high risk subject to the above reporting.
- New authorities for FCU CUSOs will be authorized by publication on NCUA website
Permissible activities for a FCU CUSO are listed in § 712.5 and have before now required notice and comment rulemaking before being changed. In contrast, NCUA’s corporate credit union CUSO rules in § 704 allowed NCUA to add permissible activities for corporate credit unions by simply publishing the new authorities on the NCUA website.
Under the final rule, NCUA will now amend permissible activities for FCU CUSOs by publishing the new authorities on the NCUA website. NCUA is reserving the right to use notice and comment for “novel” authorities in the future. NCUA will also use notice and comment before removing authorities.
Final Rule Summary: CAMELS Rating System (Parts 701, 703, 704, 713)
October 2021
Prepared by NASCUS Legislative & Regulatory Affairs Department
NCUA is updating the NCUA’s supervisory rating system from CAMEL to CAMEL”S” by adding the ‘‘S’’ (Sensitivity to Market Risk) component to the existing CAMEL rating system and redefining the ‘‘L’’ (Liquidity Risk) component. The other federal bank regulators have been using the CAMELS rating system since 1997 and over half of state credit union regulators already use CAMELS rather than the NCUA CAMEL system to more precisely measure interest rate risk (IRR).
NCUA will implement the addition of the ‘‘S’’ rating component and a redefined ‘‘L’’ rating for examinations and contacts started on or after April 1, 2022.
The CAMELS final rule may be read here. The rule becomes effective April 1, 2022.
Summary
NCUA adopted the CAMEL rating system in 1987 to reflect the significant financial, operational, and management factors that examiners assess in their evaluation of a credit union’s performance and risk profile. NCUA is now updating the agency’s supervisory rating system from CAMEL to CAMELS by adding the ‘‘S’’ component to the existing CAMEL rating system to evaluate sensitivity to market risk and adding new rating criteria and evaluation factor examples.
“S” Rating Description
| S Rating | Description |
|---|---|
| 1 | • Risk management practices & controls for market risk are strong for the size & sophistication of the credit union, and the level of market risk it has accepted. • There is minimal potential for market price or interest rate changes to create a material adverse effect on the credit union’s earnings performance or capital position. • The credit union has more than sufficient earnings and capital to support the level of market risk taken by the credit union. |
| 2 | • Risk management practices & controls for market risk are satisfactory for the size & sophistication of the credit union, & the level of market risk it has accepted. • There is only moderate potential for market price or interest rate changes to create a material adverse effect on the credit union’s earnings performance or capital position. • The credit union has sufficient earnings and capital to support the level of market risk taken by the credit union. |
| 3 | • Risk management practices and controls for market risk are not fully commensurate with the size and sophistication of the credit union, or the level of market risk it has accepted. • There is high potential for market price or interest rate changes to create a material adverse effect on the credit union’s earnings performance or capital position. • The level of market risk taken is high in relation to the credit union’s earnings or capital. |
| 4 | • Risk management practices and controls for market risk are significantly deficient given the size and sophistication of the credit union, or the level of market risk it has accepted. • There is high potential for market price or interest rate changes to threaten the viability of the credit union. • The level of market risk taken is excessive in relation to the credit union’s earnings or capital. |
| 5 | • The level of market risk taken or exposure to market price or interest rate changes is an imminent threat to the credit union’s viability. |
Modifying the ‘‘L’’ Component
Now that NCUA will adopt the CAMELS rating system, the agency will redefine the “L” component to focus exclusively on liquidity.
| L Rating | Description |
|---|---|
| 1 | • The credit union has strong liquidity levels. • The credit union has well-developed funds management policies and practices. • The credit union has reliable access to sufficient sources of funds on favorable terms to meet present and anticipated liquidity needs. |
| 2 | • The credit union has satisfactory liquidity levels. • The credit union has adequate funds management policies and practices. • The credit union has access to sufficient sources of funds on acceptable terms to meet present and anticipated liquidity needs. |
| 3 | • The credit union has low liquidity levels. • The credit union’s funds management policies and practices are not fully commensurate with its size and complexity, or the liquidity risks it has taken. • The credit union may lack ready access to funds on reasonable terms. |
| 4 | • The credit union has inadequate liquidity levels. • The credit union’s funds management policies and practices are inadequate given its size and complexity, or the liquidity risks it has taken. • The credit union is likely not able to obtain sufficient funds on reasonable terms to meet liquidity needs. |
| 5 | • Liquidity levels are so deficient there is an imminent threat to the credit union’s viability. • The credit union requires extraordinary external financial assistance to meet maturing obligations or other liquidity needs. |
Technical Amendments
Several provisions of NCUA’s rules specifically reference the CAMEL (no “S”) and will be updated to reflect the new CAMEL”S” and the refined narratives. The following provisions will be amended by replacing “CAMEL” with “CAMELS.”
| NCUA Part | Provision |
|---|---|
| Part 700 Definitions | § 700.2 |
| Part 701 Organization & Operation of FCUs | § 701.14(b) (3) (i) and (ii) § 701.14(b) (4)(i) and (ii) § 701.23(b)(2) |
| Part 703 Investment & Deposit Activity | § 703.13(d)(3)(iii) § 703.14(i) § 703.14(j)(4) |
| Part 704 Corporate Credit Unions | § 704.4(d)(3)(ii) |
| Part 713 Fidelity Bond & Insurance Coverage | § 713.6(a)(1) § 713.6(c) |
NCUA Risk Alert: 21-RISK-01 Business Email Compromise through Exploitation of Cloud-Based Email Services
October 2021
NCUA issued Risk Alert 21-Risk-01 to provide credit unions a warning regarding a common Business Email Compromise (BEC) scam and tips on mitigations measures to counter BEC fraud and wire transfer fraud.
Business Email Compromise
In one of the most effective types BEC scams, cybercriminals use phishing kits that impersonate popular cloud-based email services to compromising victim email accounts in search of information on financial transactions. Cybercriminal will often reconfigure victim’s mailboxes to delete key messages or forward key messages. Using information gathered from compromised accounts, cybercriminals impersonate email between compromised businesses and third parties to request pending or future payments be redirected to fraudulent bank accounts.
Cybercriminals will use compromised email accounts to also identify new targets for phishing and therefore a successful email account compromise at one business can affect multiple victims associated with the account.
Prevent Business Email Compromise Fraud
NCUA provides credit unions the following tips to help prevent BEC fraud:
|
Enable multi-factor authentication for all email accounts. |
Disable basic or legacy account authentication that does not support multi-factor authentication. |
|
Use caution when posting information on social media/company websites, especially job duties & descriptions, org charts & out-of-office details. |
Educate employees about BEC scams, including preventative strategies like how to identify phishing emails & how to respond to compromises. |
|
Verify all payment changes and transactions in person or via a known telephone number. |
Prohibit automatic forwarding of business email to external addresses. |
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Add an email banner to messages coming from outside your organization. |
Enable alerts for suspicious activity, such as foreign logins. |
|
Prohibit email protocols, such as POP, IMAP, and SMTP that can be used to circumvent multi-factor authentication. |
Implement email authentication technologies such as Domain-based Message Authentication Reporting and Conformance (DMARC) policies to prevent spoofing and validate incoming email. |
| Enable security features that block malicious email, such as anti-phishing & anti-spoofing policies. | Ensure changes to mailbox login and settings are logged and retained for at least 90 days. |
Prevent Wire Transfer Fraud
Cybersecurity threats resulting in wire transfer fraud are increasing and NCUA notes it is essential to ensure that proper wire controls are in place.
| Operational Controls | Transactional Controls | Physical & Logical Controls |
|---|---|---|
| • Dual controls and separation of duties | • Call-back parameters | • Multi-factor authentication |
| • Documented and board-approved policies and procedures | • System enforced monetary thresholds | • Patch management, virus protection, and firewall protection |
| • Timely balancing and reconciliation of related accounts | • System enforced end user monetary limits | • System access controls |
| • Incident response and business continuity planning and testing | • System enforced time-of-day restrictions | • Network security policies |
| • Automated velocity monitoring | • Member and staff information security training | |
| • Exception handling procedures | ||
| • Enhanced due diligence and monitoring of high-risk members and activity |
Report and Recover Funds from Business Email Compromise Fraud
Credit unions that identify BEC or a wire transfer fraud should:
- File a complaint with the FBI
- Contact their wiring originating financial institution as soon as possible to request a recall or reversal and initiate a Hold Harmless Letter or Letter of Indemnity with the receiving financial institution
- Follow FinCEN guidance for filing Suspicious Activity Reports on BEC incidents
Additional information on BEC is available at the FBI’s Internet Crime Complaint Center Business Email Compromise webpage. Additional information on authentication is available from FFIEC: Authentication and Access to Financial Institution Services and Systems
LTCU 21-CU-10 Interagency Statement on LIBOR Transition
October 2021
NCUA issued LTCU 21-CU-10 to follow-up on Letter to Credit Unions 21-CU-03, LIBOR Transition (NASCUS summary here) and make credit unions aware of a Joint Statement issued by state and federal bank and credit union regulators outlining supervisory expectations related to bank and credit union transition away from LIBOR. NCUA reiterates its expectations that all FICUs transition away from using U.S. dollar LIBOR as a reference rate as soon as possible, but no later than December 31, 2021, and to ensure existing contracts have robust fallback language that includes a clearly defined alternative reference rate.
The Joint Statement by the state & federal regulators reminds institutions that Failure to adequately prepare for the end of LIBOR could create safety and soundness issues and increase litigation, operational, and consumer protection risks. Other supervisory considerations detailed in the Joint Statement include:
- Clarification on the meaning of new LIBOR contracts – Financial institutions should be careful about entering into new contracts before December 31, 2021, that create additional LIBOR exposure for a supervised institution or extends the term of an existing LIBOR contract. New contracts should either use a reference rate other than LIBOR or have fallback language that provides for use of a strong and clearly defined alternative reference rate after LIBOR’s discontinuation.
- Considerations when assessing the appropriateness of alternative reference rates Institutions must conduct the due diligence necessary to ensure that alternative rate selections are appropriate for their products, risk profile, risk management capabilities, customer and funding needs, and operational capabilities.
- Expectations for fallback language – Institutions should identify all existing contracts that reference LIBOR and lack adequate fallback language. As noted above, all future contracts should consider fallback language in the event the initial benchmark is discontinued.
- Additional considerations – Institutions are encouraged to take the following actions as they prepare for the LIBOR transition:
- develop and implement a transition plan for communicating with consumers, clients, and counterparties
- ensure systems and operational capabilities will be ready for transition to a replacement reference rate after LIBOR’s discontinuation
LTCU 21-CU-11 Emergency Capital Investment Program
October 2021
NCUA issued LTCU 21-CU-11 to address the agency’s reconsideration of its position with respect to LICU ability to participate in the Treasury Department’s Emergency Capital Investment Program’s (ECIP) issuance of 30-year subordinated debt instruments. NCUA also provided credit unions a copy of the Supervisory Letter issued to NCA examiners on the subject (SL No. 21-02 Emergency Capital Investment Program).
NCUA has, in its words, “recalibrated its position” and will now allow LICUs participating in the ECIP to accept 15-year or 30-year subordinated debt investments from the ECIP (but will only receive a maximum of 20 years capital treatment).
LICUs that have already had their secondary capital plans approved by NCUA for issuances under the ECIP have 30 days from October 20, 2021, to notify their respective NCUA Regional Office and SSA in writing of the following:
- The stated maturity of the ECIP subordinated debt note chosen (15 or 30 years)
- The length of regulatory capital treatment for the ECIP issuance (max 20 years)
The written notification must also contain a statement indicating that the credit union will not materially deviate from the strategies outlined in the previously approved secondary capital plan. If a credit union chooses a maturity that is longer than the maturity used in the originally approved secondary capital plan and must materially deviate from the previously approved plan’s strategies, than a new plan must be submitted pursuant to 12 C.F.R. §741.204(c).
Finally, NCUA notes that it is considering a rule change that would extend the starting period of the 20 years for ECIP issuances to the later of the date of issuance or January 1, 2022. (See the proposed rule and NASCUS’s summary and comment letter here).
Proposed Rule: Subordinated Debt
Prepared by NASCUS Legislative & Regulatory Affairs Department
October 2021
NCUA is proposing changes to the Subordinated Debt rule taking effect on January 1, 2022, to accommodate the Treasury Department’s Emergency Capital Investment Program (ECIP). If finalized, the rule would amend the definition of ‘‘Grandfathered Secondary Capital’’ to include:
- Any secondary capital issued to the United States Government or one of its subdivisions (U.S. Government), under an application approved before January 1, 2022, irrespective of the date of issuance.
This change would allow low-income credit unions (LICUs) that are either participating in the ECIP or other government programs that can be used to fund secondary capital, even if they do not receive the funds for such programs by December 31, 2021. NCUA would also extend the expiration of regulatory capital treatment for these issuances to the later of 20 years from the date of issuance or January 1, 2042.
The proposal may be read here. Comments are due to NCUA on October 28, 2021.
Summary
Upon its effective date on January 1, 2022, the Subordinated Debt final rule (Sub Debt rule) would generally require secondary capital issuance to comply with the requirements for Subordinated Debt.
Grandfathered Secondary Capital
The Sub Debt rule grandfathers secondary capital issued before January 1, 2022, allowing it to receive regulatory capital treatment until January 1, 2042 (20 years from the effective date of the final rule) and allowing the secondary capital to be subject to the requirements of current § 701.34(b), (c), and (d) (recodified as § 702.414 in the Sub Debt rule), rather than the requirements of the final rule.
Under the Sub Debt rule, any issuances of secondary capital not completed by January 1, 2022, must comply with the new final rule as of January 1, 2022. This means any approved secondary capital applications would be nullified if the associated issuance was not completed before January 1, 2022.
Treasury’s Emergency Capital Investment Program
After the Sub Debt rule was finalized, Congress passed the Consolidated Appropriations Act, 2021 which, among other things, created the ECIP. Under ECIP, the Treasury Department will make investments in ‘‘eligible institutions’’ to support their efforts to provide financial assistance to small businesses, minority-owned businesses, and consumers. FICUs that are minority depository institutions or community development financial institutions qualify as eligible institutions. The investments to be made by the Treasury Department would be in the form of subordinated debt and were designed to align with the FCUA and NCUA’s secondary capital rules.
Treasury’s ECIP application process has been delayed several times. As a result, it is likely that LICUs that applied for ECIP funds would receive those funds AFTER the January 1, 2022, Sub Debt rule deadline and therefore would not be able to use those funds as regulatory capital without a change the Sub Debt rule.
Proposed Rule
The proposed rule would permit funding of secondary capital approved under the current rule, beyond 2021, without the need to reapply under the Subordinated Debt rule for ECIP or other government programs if the issuance:
- is being conducted under a secondary capital application that was approved before January 1, 2022, under either § 701.34 (FCUs) or § 741.203 (FISCUs) but the funds are dispersed after January 1, 2022
Other important aspects of the proposed change include:
- A LICU operating under an approved secondary capital plan may only conduct those capital issuances in accordance with the terms & conditions of the plan.
- Any LICU that receives an investment from the U.S. Government that is less than the amount approved under its secondary capital application with the NCUA would be limited to only that lesser investment and would not be permitted to use the proposed exception to conduct subsequent issuances.
- If a LICU receives a lesser investment amount, the NCUA reserves the right to revisit the LICU’s approved plan to verify that the LICU continues to operate in accordance with that plan.
NCUA is also proposing to amend the starting point for Grandfathered Secondary Capital to retain its status as Regulatory Capital. Currently, the Subordinated Debt rule states that all Grandfathered Secondary Capital will be treated as regulatory capital until January 1, 2042. To accommodate ECIP funds that may be disbursed AFTER January 1, 2022, NCUA would allow such secondary capital to count as regulatory capital for up to 20 years from the date of issuance.