Phased Approach to On-site Operations

Letter to Credit Unions 20-CU-20: Phased Approach to On-site Operations

June 2020

NCUA issued LTCU 20-CU-20 to inform stakeholders of NCUA’s current “multi-phase transition plan” for resuming its normal on-site operations (Return to Normal Operations or RTNO). NCUA notes that its transition to RTNO may begin as early as July 6, 2020.

In Phase 1 of its RTNO, NCUA will:

  • continue to encourage both field and office staff to work remotely when possible
  • place limits on the number of staff working in NCUA offices
  • implement social distancing and other precautionary measures in offices
  • will distribute PPEs to both field and office staff

NCUA states that examiners may begin (after July 6) conducting voluntary on-site examinations and that more specific implementation details will be published before that begins. NCUA notes that it will continue to coordinate examination and supervision efforts with SSAs.

Letter to Credit Unions 20-CU-19: Additional Guidance Regarding Servicing Hemp-Related Businesses

June 2020

NCUA has issued an update to guidance for credit unions related to serving Hemp businesses. The original guidance, 19-RA-02, was issued in 2019 after the USDA published its initial Interim Final Rule for growing Hemp pursuant to the 2018 Farm Bill. The updated guidance, LTCU 20-CU-19 provides credit unions with the following 17 FAQs (summarized & edited for brevity):

  • What is the status of the USDA’s Interim Final Rule on hemp production?

The USDA’s Interim Final Rule (IFR) was issued on 10/31/19 and took effect upon publication. The USDA website has hemp-related resources and a webpage dedicated to rulemaking documents.

 Does the IFR mean that hemp can be legally produced in every state?

No. The 2018 Farm Bill did not preempt state or tribal laws regarding the production of hemp that are more stringent than federal law or that may prohibit hemp in its entirety. If permitted by the state, hemp may be grown pursuant to the USDA rules and the 2018 Farm Bill or the 2014 Farm Bill (2014 Farm Bill authority will expire on November 1, 2020).

  • How can I determine if a state or Native American tribe has submitted a hemp production plan to the USDA for approval?

The USDA provides detailed information on state and Tribal plans submitted for approval on its website.

  • What if the state or tribal territory we serve has not had a hemp production plan approved by the USDA?

In states that permit hemp production but do not have USDA approved regulatory plans, hemp producers have 2 options:

    • They can operate pursuant to the 2014 Farm Bill until November 1, 2020
    • They can apply for a license from the USDA directly pursuant to the USDA’s regulatory plan
  • Who is responsible for ensuring that hemp producers comply with a state, Tribal, or USDA-approved hemp production plan?

In states or Tribal territories with USDA approved plans, enforcement and regulation is conducted by the designated state or Tribal authority. For producers operating under the USDA plan, enforcement and regulation is overseen directly by the USDA.

  • Aside from hemp production, does the USDA IFR cover other hemp-related businesses such as manufacturing, processing, distribution, shipping, and retail?

No. The USDA only sets forth the requirements for engaging in hemp production as authorized by the 2018 Farm Bill. As noted in the August 2019 NCUA Regulatory Alert regarding Hemp, credit union should be aware of other statutes and regulations that may affect the distribution, shipping, sale, and use of hemp products. In particular, substantial issues may be raised by the Federal Food, Drug, and Cosmetic Act and the Public Health Service Act. The U.S. Food and Drug Administration (FDA) has a webpage dedicated to hemp.

  • Where can I learn more about FDA requirements applicable to cannabis-derived products, including cannabidiol (CBD)?

The FDA has created a webpage dedicated to cannabis derived products such as CBD. The legality of the sale of CBD is a complicated issue with implications for how the product is used, labeled, and marketed. In addition, whether the CBD is infuse into food and beverages or dietary supplements will determine whether or not the sale of the product violates the Federal Food Drug and Cosmetics Act and other applicable federal regulations related to consumer products and safety.

  • Has FinCEN provided any guidance related to hemp?

Yes. FinCEN, the Board of Governors of the Federal Reserve System, the FDIC, the OCC, and CSBS issued a joint statement in December, 2019 that aligned with NCUA’s 2019 Regulatory Alert.

  • Will NCUA examinations conducted in 2020 cover hemp?

In 2020, NCUA examiners will be collecting data through the examination process concerning the types of services credit unions are providing to hemp-related businesses to help the agency better understand how it can assist credit unions serving hemp-related businesses.

  • Does the NCUA prohibit credit unions from providing services to hemp-related businesses?

No. Credit unions may provide the customary range of financial services for business accounts, including loans, to lawfully operating hemp-related businesses within their fields of membership.

  • What should a credit union board consider when evaluating whether to provide services to a hemp business?

Credit unions need to be aware of the federal, state, and Native American tribal laws and regulations that apply to any hemp-related businesses they serve and understand the complexities and risks involved.

  • Can a credit union provide loans to a hemp-related business?

Lending to a lawfully operating hemp-related business is permissible. Such loans are commercial loans subject to § 723 of NCUA’s rules or any state specific commercial lending rules where applicable. Credit unions should understand the complex regulatory regime governing such businesses and remain mindful of the unique risks when underwriting and managing hemp-related loans.

  • What is the credit union expected to do to ensure the hemp business is operating lawfully?

As they would with any account, credit unions must maintain appropriate due diligence procedures for hemp-related accounts. The extent and nature of the due diligence will likely vary by accounts and is a business decision for the credit union. NCUA suggests credit unions consult legal counsel when determining the appropriate level of due diligence. Credit unions should verify that hemp growers possess a valid state or USDA license to grow hemp. However, credit unions are not expected to serve as the enforcement authority tasked with policing the hemp industry for illegal activity.

  • Can a credit union decide not to serve hemp-related businesses?

The decision to serve any business is made by each individual credit union.

  • Is there a list of credit unions that serve hemp-related businesses?

NCUA notes that the agency does not maintain a list of credit unions serving hemp-related businesses “at this time.”

  • Do credit unions need to file marijuana related SARs on legally operating hemp businesses, provided the activity is not unusual for that business?

No, unless a credit union reasonably believes the hemp business is operating unlawfully and there is no other unusual activity, than a marijuana-related SARs need not be filed.

  • Where can I learn more?

The USDA has published numerous resources. Credit unions with questions regarding state or Native American tribal laws and regulations should contact the state or Native American tribe government. Credit unions with hemp-related food, drug, and cosmetic questions should contact the FDA.

Letter to Credit Unions 20-CU-18: PCA Regulatory Relief Measures in Response to the COVID-19 Pandemic

June 2020

In May, 2020, the NCUA Board approved changes to the Prompt Corrective Action (PCA) requirements in Part 702 of its Rules and Regulations. Part 702 applies to federally insured state credit union (FISCUs) by reference in § 741.3(a)(1). The Interim Final Rule took effect upon publication on May 28, 2020.

NCUA’s LTCU 20-CU-18 discusses the agency’s Administrative Order temporarily decreasing the earnings retention requirement for adequately capitalized credit unions pursuant to § 702.201(b)(2) as well as the authority for undercapitalized credit unions to submit a streamlined net worth restoration plan (NWRP) if their net worth ratio declined predominantly due to temporary share growth during the COVID-19 pandemic.

Administrative Order & Part 702.201 Adequately Capitalized Credit Unions

Per the Order, between March 31, 2020 and December 31, 2020, adequately capitalized natural person credit unions that are unable to meet the earnings retention requirement may decrease their earnings retention requirement to zero without submitting an application to the NCUA Regional Director. After December 31, 2020, the requirements of part 702 apply as before, including the earnings-retention requirement and the requirement to seek a waiver on case-by-case basis.

Credit unions posing an undue risk to the NCUSIF or exhibiting material safety and soundness issues may be required to submit an application for a decrease in the earnings retention requirement in accordance with § 702.201(b).

Part 702.206(c) & Streamlined Net Worth Restoration Plans

Recognizing that some credit unions may experience substantial COVID-19 related short-term increases in shares from stimulus deposits or consumer flight to safety, NCUA will temporarily permit credit unions to submit a streamlined NWRP. The streamlined NWRP must attest that the reduction in the credit union’s net worth ratio was predominantly caused by share growth and that such share growth is a temporary condition due to COVID-19.

When approving streamlined NWRPs, NCUA Regional Directors will:

  • verify that the decline in the NWR was driven by an increase in total assets, and that the increase in total assets is attributed to an increase in shares, not borrowings or other sources of funds; and
  • Consult with the applicable SSA for FISCU submissions.

FISCUs must comply with applicable state requirements when submitting an NWRP for state supervisory authority approval.

Furthermore, NCUA notes the fllowing:

  • A Credit union expecting a decline in NWR to below 4% should notify their NCUA examiner and submit a NWRP in accordance with  702.206.
  • NCUA will evaluate compliance with outstanding NWRPs, including those approved under this temporary provision, on a case-by-case basis.
  • Less than adequately capitalized credit unions continuing to experiencing capital deficiencies may be required to submit a revised NWRP pursuant to  702.206(c).
Regulatory Alert 20-RA-05 Remittance Transfers under the EFT Act

June 2020

NCUA’s Regulatory Alert provides credit unions information regarding changes to the CFPB’s Remittance Rule (Regulation E) which implements the Electronic Fund Transfer Act (EFT Act). The changes take effect July 21, 2020.

The CFPB’s new rule makes the following changes:

  • The new rule increases the safe harbor threshold, and removes from coverage of the rule, credit unions and banks that provide 500 or fewer transfers annually. This is an increase from the current threshold of 100 or fewer transfers.
  • Establishes 2 new permanent exceptions to the rule which allow credit unions and banks to disclose estimates of the exchange rate and covered third-party fees instead of exact amounts:
  • Entities may provide an estimate of the exchange rate for transfers to a particular country if the credit union or bank made 1,000 or fewer transfers in the prior calendar year to the particular country in which the transfer recipients received funds in that country’s local currency and the credit union or bank cannot determine the exact exchange rate for that transaction.
  • Credit unions and banks may estimate the 3rd-party fee for a transfer to a designated recipient’s institution if 1) the financial institution made 500 or fewer transfers to the designated recipient’s institution in the prior calendar year; 2) at the time the disclosure must be given the credit union or bank cannot determine the exact amount of the 3rd-party fee; and 3) the remittance is sent from the sender’s credit union account (not including pre-paid accounts).

Additional Changes

  • The final rule includes a transition period for credit unions and banks that exceed the new exception thresholds.
  • The final rule also adds an exception to allow a credit union or bank to estimate 3rd-party fees when another federal statute or regulation prohibits the institution from determining the exact amount of the fee.
  • The CFPB will develop improved procedures to consider requests to make changes to the exchange rate countries list.

NCUA’s Office of Consumer Financial Protection may be contacted by phone (703.518.1140) or e-mail ([email protected]).

Letter to Credit Unions 20-CU-17 Update to Offsite Examination and Supervision Approach

May 2020

NCUA is updating its supervisory approach implemented in response to the COVID-19 crisis and originally announced in March in Letter to Credit Unions 20-CU-05, Offsite Examination and Supervision Approach. Notably, NCUA’s updated approach includes a return to issuing Reports of Examination (ROE).

Conducting Work Offsite

NCUA will continue to operate with its employees and contractors working offsite and will continue its general moratorium on new on-site exam work until further notice. However, NCUA may conduct onsite work at a credit union as necessary to address serious or time-sensitive matters. NCUA noted since March 16, 2020 NCUA examiners have conducted offsite examination work at over 100 credit unions. NCUA examiners will continue to be mindful of the impact exam information requests may have on a credit union experiencing operational and staffing challenges associated with the COVID-19 pandemic. NCUA Regional offices will continue to coordinate with SSAs on supervision efforts for FISCUs.

Issuing Examination Reports

NCUA will begin issuing ROEs for the examinations NCUA examiners complete off-site. NCUA reiterated that corrective actions issued to a credit union would consider the impact of the COVID-19 pandemic on the credit union’s operations and financial condition. In announcing this change, NCUA emphasized:

  • Credit unions would not be criticized for efforts to provide prudent relief for members so long as those relief efforts are conducted in a safe and sound manner. NCUA examiners WILL consider whether a credit union’s relief efforts elevate, or reduce, a credit union’s risk exposure.
  • Additional risk, even if prudently undertaken, may be reflected in NCUA’s CAMEL rating of the credit union.
  • TO ensure consistent application of these concepts, NCUA has instituted an enhanced internal review process for all ROEs.

For more information on the CAMEL rating system, see NCUA’s Letter to Credit Unions, 07-CU-12, CAMEL Rating System.

This amended off-site approach became effective on June 1, 2020.

Letter to Credit Unions 20-CU-16 Low-Income Designations: Qualification of Military Personnel

May 2020

NCUA has announced it is changing the agency’s approach to determining whether a credit union qualifies for designation as a low income credit union (LICU) pursuant the

Federal Credit Union Act (FCUA) and Part 701.34 (applicable to FISCUs by reference in Part 741.204). The regulation generally defines a low-income member as a member whose family income is 80% or less than the median family income.

Prior to this change, NCUA’s determined LICU status by assigning incomes based on geocoding of members’ addresses. However, NCUA asserts that this methodology cannot account for military personnel with Army/Air Post Office (APO) or Fleet Post Office (FPO) mailing addresses and therefore excluded them from the analysis. The change of methodology announced by NCUA seeks to address that issue.

Based on a determination by NCUA’s Office of Chief Economist that a majority of military personnel would qualify as low-income members, NCUA is changing its methodology to include APO/FPO addresses in the LICU analysis with a percentage (designated by NCUA) included as low-income members.

NCUA’s geocoding approach is a assumption based methodology. However, some credit unions may have members that don’t adhere to the methodology’s models and assumptions. For those credit union, NCUA also provides an option to submit additional information to NCUA to demonstrate the credit union qualifies for a LICU designation. Credit unions may submit to NCUA’s CURE office the following:

  • a list identifying members who are active-duty military personnel (no additional information is necessary) for NCUA to factor into their military methodology formulation discussed above; or
  • granular data for military members, including active-duty and members of the Reserve and the National Guard. Data could include actual income, paygrade, years of service, or rank of its military members.

Credit unions also have the option of conducting their own analysis to demonstrate that all or some portion of military membership qualify as low-income.

Letter to Credit Unions 20-CU-15 Principles for Making Responsible Small-Dollar Loans

May 2020

NCUA issued LTCU 20-CU-15 to discuss interagency guidance issued together with the Federal Reserve System, FDIC, and OCC related to small dollar lending programs: Interagency Lending Principles for Offering Responsible Small-Dollar Loans. The interagency guidance (principles) follows NCUA’s issuance in March 2020 of LTCU 20-CU-04 Responsible Small-Dollar Lending in Response to COVID-19 and a March 2020 joint statement from the federal bank regulators: Joint Statement Encouraging Responsible Small-Dollar Lending in Response to COVID-19.

The principles described in the new interagency guidance apply to all credit unions that make small-dollar loans. NCUA, emphasizing that effectively managing the credit, operational, and compliance risks associated with small dollar loans is important for credit unions, identifies 4 essential elements:

  • Credit unions should underwrite small-dollar loans based on prudent policies
  • Credit unions should offer small dollar loans in a manner consistent with safe and sound practices
  • Credit unions must comply with all applicable consumer protection and other laws and regulations
  • Credit unions should treat members fairly

NCUA notes that FCUs have the option of providing PALs under § 701.21(c)(7)(iii) and

PALs I PALs II
$1,000 maximum loan $2,000 maximum loan
6-month maturity 12-month maturity

 

Regulatory Alert 20-RA-03 CFPB Issues Interpretive Rule on Waiver of TRID and TILA Waiting Periods

May 2020

NCUA’s Regulatory Alert discussed the CFPB’s interpretive rule clarifying when consumers can elect to modify or waive certain required waiting periods for some mortgage loans under the TILA-RESPA Integrated Disclosure (TRID) rule and the Regulation Z right of rescission rule (See 12 CFR 1026.15 and 1026.23). 

Under the interpretive rule, a borrower’s need to obtain funds and not delay closing for reasons related to the COVID-19 pandemic may be a “changed circumstance” or “bona fide personal emergency” which would permit borrowers to waive waiting periods under both rules, or permit a credit union to amend some TRID documents.

NCUA encourages credit unions to inform borrowers of their ability to forego the waiting periods.

The interpretive rule also designates COVID-19 to be a permissible “changed circumstance” under the TRID rule for revising fee disclosures to reflect higher costs for the transaction (such as increased appraisal fees).

NASCUS Note:

The CFPB also issued a FAQ regarding the waiving of the timing requirement under the ECOA Valuations Rule.

Regulatory Alert 20-RA-04 CFPB Increases Reporting Thresholds Under HMDA

May 2020

NCUA’s Regulatory Alert discusses the May 12, 2020 CFPB final rule amending parts of Regulation C which implement the Home Mortgage Disclosure Act (HMDA). The final rule:

  • Effective July 1, 2020 the threshold for collecting and reporting data about closed-end mortgage loans is increased from 25 to 100, for calendar year 2020. It also increases the threshold for collecting and reporting
  • Effective January 2, 2022 the threshold for collecting data about open-end lines of credit is increased from 100 to 200.
  • The asset size foe collection of data remains unchanged: credit unions with total assets of $47m or less of December 31, 2019, are not subject to HMDA in 2020.

 What this means for credit unions:

Effective July 1, 2020 Collecting Recording Reporting
Closed-End Mortgage threshold increases from 25 to 100 Newly excluded CUs can stop closed-end mortgage HMDA data on July 1, 2020.  Newly excluded CUs must still record closed-end data for 1st quarter of 2020 on a loan/application register no more than 30 calendar days after the end of the first quarter Newly excluded CUs need not file this HMDA data on March 1, 2021.

NOTE: This rule change only applies to HMDA. Other regulations, such as  Regulation B (requiring collection of  information regarding ethnicity, race, sex, marital status, and age when credit is sought for purchase/refinancing of a primary residence dwelling that also secures the credit.

For calendar year 2021, a credit union is not required to collect HMDA data for closed-end mortgage loans if it originated fewer than 100 closed-end mortgage loans in 2019 or 2020.

Effective January 1, 2022 Beginning in 2022
The open-end line of credit threshold will be set at 200. This is when the temporary threshold of 500 loans is set to expire CUs that originated at least 200 open-end lines of credit in 2020 and 2021 must collect and record HMDA data on their 2022 open-end lines of credit and report that data by March 1, 2023. 

The HMDA provisions may be found in Regulation C. CFPB will not update the current version of Regulation C until the effective dates of the amendments.

NCUA Final Rule: Part 722 Appraisals

Prepared by NASCUS Legislative & Regulatory Affairs Department
May 2020

NCUA has published a final rule amending Part 772 regarding appraisals for certain residential real estate related transactions. The final rule increases the threshold level below which appraisals are not required for residential real estate related transactions from $250,000 to $400,000. In transactions below the threshold, federally insured credit unions have the option of obtaining either an appraisal, or a written estimate of market value of the real estate collateral. In addition, the final rule explicitly incorporates the existing statutory requirement that appraisals be subject to appropriate review for compliance with the Uniform Standards of Professional Appraisal Practice (USPAP).

The Final Rule proposed rule may be read here. The rule became effective April 30, 2020.  

NCUA’s appraisal rules in § 722 apply to federally insured state credit unions by reference in § 741.203(b).

Summary

NCUA’s appraisal rule, Part 722, is promulgated pursuant to Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (Title XI). The last time NCUA adjusted its appraisal threshold was in 2001 when the limit was raised to $250,ooo. NCUA notes that the $400,000 threshold for residential real estate related transactions would exempt about the same number of transactions as the $250,000 threshold when it was established in 2001.

  • 722.3(b)(2) Appraisal Threshold

The final rule amended the appraisal threshold in § 722.3(b)(2) to raise the limit below which an appraisal is not required for a residential real estate transaction to $400,000. For residential real estate transactions less than $400,ooo, credit unions have the choice of obtaining either a waiver, or a written estimate of market value.

  • 722.4(c) Uniform Standards of Professional Appraisal Practice

Part 722.4(c) will be amended to incorporate the existing statutory requirement that appraisals be subject to appropriate review for compliance with the Uniform Standards of professional Appraisal Practice (USPAP). The revisions also delete as unnecessary the additional requirements for the appraisal exemption for certain transactions in rural areas.

-End-

Letter to Credit Unions 20-CU-14 Establishment of CLF Agent Memberships

May 2020

NCUA issued LTCU 20-CU-14 to announce that all 3,700+ credit union with assets less than $250 million may access the Central Liquidity Facility (CLF). This is because all 11 remaining corporate credit unions agreed to subscribe to CLF stock as agents for all their members with less than $250 million in assets. In addition, the corporate credit unions action has increased the CLF’s borrowing authority by over $13 billion.

NCUA’s LTCU 20-CU-08, Enhancements to the Central Liquidity Facility Membership and Borrowing Authority provided information on changes to the CLF  resulting from the (CARES) Act, including allowing corporate credit union to become agent members of the CLF for a subset of their NPCU members rather than for ALL of their NPCU members. This special “subset” membership authority sunsets on December 31, 2020.

Credit unions seeking loans from the CLF should contact their corporate credit union. The corporate credit union can process the request for the credit union on behalf of the CLF. For more information, NCUA has resources on the CLF website.

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.