NCUA’s OCI did not account for the volume of the complex activity indicator in each credit union. After reviewing the rule, NCUA believes changes are necessary to better right-size the OCI. NCUA is proposing to revise the original complexity index (Revised Complexity Index “RCI”), and to apply a new Complexity Ratio (CR) for analyzing the portfolios of assets and liabilities of credit unions to determine the proper asset threshold over which credit union are ‘‘complex.’’

As noted in the above chart, NCUA is amending 6 of the indicators:

1. Member Business Loans – NCUA will replace the indicator for ‘‘member business loans’’ with an indicator for ‘‘commercial loans’’ to reflect changes to the NCUA’s member business lending rule.
2. Participation Loans – NCUA will replace the indicator for ‘‘participation loans’’ (which included participation loans sold and participation loans held) with an indicator for ‘‘participation loans sold’’ to restrict the indicator to what NCUA considers the most complex component of participation loans.
3. Interest Only Loans – NCUA will replace the indicator for ‘‘interest only loans’’ to exclude first-lien mortgages.
4. Internet Banking – NCUA will remove the indicator for ‘‘internet banking’’ in its entirety because it has become common place.
5. Investments with Maturities Greater than 5 Years – NCUA will remove the indicator for ‘‘investments with maturities greater than five years (where the investments are greater than one percent of total assets)’’ because the indicator is adequately captured in the other index components.
6. Real Estate Loans – Replace the indicator for ‘‘real estate loans (where the loans are greater than five percent of assets and/or sold mortgages)’’ with an indicator for ‘‘sold mortgages.”

NCUA provides data that shows credit unions with $500 million or more in total assets ALL engage in at least one complex activity, and 96% engage in 3+complex activities.

Specific Request for Comments
NCUA specifically requests comments on 2 issues:

1. The increase of the asset threshold for “covered credit unions” from $100 million in assets to $500 million in assets; and
2. The delay of the effective date of the rule from January 1, 2019, to January 1, 2020.

NASCUS is evaluating other issues
As noted above, there are several additional issues that NCUA does not specifically seek comment on, but NASCUS is evaluating for possible inclusion in formal comments:

1. Supplemental Capital – NCUA should use the extended delay to promulgate a regulatory framework for supplemental capital.
2. Consultation with State Regulators – Section 1790(l) of the Federal Credit Union Act directs NCUA to consult and cooperate with state regulators to implement PCA provisions. NCUA should use the delayed effective date to form a working group of state regulators to review comments and develop any further needed refinements for the rule.
3. The 2015 Risk Weightings – The proposed supplemental rule does not address the original 2015 risk weightings for RBC. NCUA should review those risk weightings to ensure they accurately reflect material risk in light of the changing nature of the credit union system NCUA cites in proposing the changes in this proposal.
4. Appropriateness of using an Asset Threshold – NCUA asserts that the use of an asset threshold, rather than specific portfolio thresholds makes for ease of administration. NASCUS will evaluate if this is truly the bets approach.
5. Future Changes to Asset Threshold – As evidenced by this supplemental rulemaking, NCUA has noted in the preamble to the 2015 final rule, the agency may revisit the complexity indicators to determine the proper asset threshold for covered credit unions. NASCUS will consider whether the regulation itself should contain an explicit reference to formally re-evaluating the asset threshold.

Part 713 and Part 704 Fidelity Bond Coverage
(741.201)

NCUA Proposed Rule
Summary

Prepared by NASCUS Legislative & Regulatory Affairs Department
December 2018

NCUA has proposed amendments to Parts 713 and 704, its rules for federally insured natural person credit union and corporate credit union fidelity bond requirements. Part 713 is written for federal credit unions (FCUs) but applies, in part, to federally insured state-chartered credit unions (FISCUs) by reference in Part 741.201.
NCUA asserts the proposed changes would accomplish the following 4 objectives:

• Strengthen credit union board oversight of fidelity bond coverage
• Ensure an adequate period to discover and file fidelity bond claims following a credit union’s liquidation
• Codify a 2017 NCUA legal opinion that permits a natural person credit union’s fidelity bond to include coverage for certain CUSOs (17-0959)
• Clarify the documents subject to Board approval and require that all bond forms receive Board approval every ten years

NASCUS Note: While FISCUs are subject to Part 741.201 for fidelity bond coverage, NCUA is not proposing changes to that section. Currently, Part 741.201 does not appear to incorporate by reference ALL of Part 713.
NCUA’s proposed rule may be read here. The proposed rule is open for comment until January 22, 2019.

Summary
The Federal Credit Union Act (FCUA) requires that certain federal credit union employees and appointed and elected officials be subject to fidelity bond coverage. The FCUA authorizes NCUA to promulgate regulations regarding both the amount and character of fidelity bond coverage. NCUA is also authorized to approve bond forms.
NCUA carries out the FCUA directive for FCUs in Part 713, for all corporate credit unions in Part 704.18, and for FISCUs by partial reference in Part 741.201.
These provisions:

• establish the requirements for a fidelity bond and the acceptable bond forms
• establish the minimum permissible coverage
• require a credit union’s board of directors to review its bond coverage annually to ensure it is adequate in relation to the potential risks facing the credit union and the minimum requirements set by the Board

In 2014, Part 704 was revised to limit the deductible a corporate credit union may pay to a percentage of its capital based on its leverage ratio. Part 713, however, has not been substantively revised since 2005. NCUA’s interpretation of the rule requires natural person credit unions purchase an ‘‘individual policy.’’ Before 2017, the NCUA’s Office of General Counsel (OGC) had issued legal opinions stating that a credit union may not include one or more CUSOs or other parties as additional insureds under its fidelity bond because of the ‘‘individual policy’’ limitation. In September 2017, OGC reversed its opinions and now says that the ‘‘individual policy’’ requirement generally prohibits joint coverage under fidelity bonds but does not prohibit a policy that covers both the credit union and its CUSOs.
NCUA’s Proposed Changes

• Part 704.18(b) – NCUA proposes amending Part 704.18(b) by adding a new 18(b)(2) requiring a corporate credit union’s board of directors and supervisory committee review all applications for purchase or renewal of its fidelity bond coverage. After review, the board must pass a resolution approving the purchase or renewal of the fidelity bond coverage and delegate one member of the board, who is not an employee of the corporate credit union, to sign the purchase or renewal agreement and all attachments. No board members may be a signatory on consecutive purchase or renewal agreements for the same fidelity bond coverage policy.
• Part 704.18(c) – NCUA proposes splitting the corporate credit union fidelity bond provision into 5 new subparagraphs. New requirements include:
  

  • 704.18(c)(3) – NEW – would substantively amend the requirements for corporate credit union approved bond forms. Would require NCUA Board approval of all bond forms before a corporate credit union may use them. Also, corporates would not be allowed to use any bond form that has been amended since receiving NCUA Board approval or any rider, endorsement, renewal, or other document that limits coverage of approved bond forms without first receiving approval from NCUA. Approval of all bond forms expires 10 years after the date the Board approved or reapproved use of the bond form. Any currently approved bond forms would expire on January 1, 2029.
  • 704.18(c)(4) – NEW – would require fidelity bonds to include an option for the liquidating agent to purchase coverage in the event of an involuntary liquidation extending the discovery period for a covered loss for at least 2 years after liquidation. For voluntary liquidations, fidelity bonds would be required to remain in effect, or provide that the discovery period is extended, for at least four months after the final distribution of assets.

Current Part 704.18 paragraphs (d), (e), and (f) would be unchanged by the proposal.

• Part 713.1 – Scope – retains most of the current § 713.1 while expanding the application of ALL of Part 713 to FISCUs. The proposed rule would add the words ‘‘federally insured’’ before the words ‘‘credit union’’ to apply to FISCUs and would “cross reference“ § 741.201 as well as contain a reference for corporate credit unions directing them to 704.18.
  

   

  NASCUS note: the proposed rule does not provide draft new language for Part 741 and is unclear how that provision would be clarified.

• Part 713.2 – Director Responsibility – would divide the current section into 2 subparagraphs. Current § 713.2 would become paragraph (a). The term ‘‘federal credit union’’ would be revised to ‘‘federally insured credit union.’’ 2(b) The proposed rule would add a new paragraph (b) to § 713.2. Proposed paragraph (b) increases a board of directors’ oversight responsibility of its FICU’s fidelity bond coverage. A FICU’s board and supervisory committee (if applicable) would be required to review all applications for purchase or renewal of bond coverage and to pass a board resolution approving the purchase or renewal. One board member (a non- CU employee) must sign the attestation for bond purchase or renewal (same board member may not sign attestation for renewal in consecutive years). NCUA’s goal is to prevent rescission of fidelity coverage resulting from the signatory’s knowledgeable of fraudulent activity.

• Sec. 713.3 – Bond Coverage – Among changes to § 713.3 is streamlining of existing provisions and the addition of several new provisions. One new requirement (713.3(a)(3))would be that a FICU’s bind coverage include a provision that allows the liquidating agent to purchase a Discovery Extension, extending the period to discover and file a claim for at least two years after liquidation. Another new requirement for FISCUs would be new 713.3(a)(4) requiring fidelity bond coverage remain in effect, or provide that the discovery period is extended, for at least four months after the final distribution of assets. This provision already applies to FCUs in Part 710.

NCUA is also proposing new Part 713.3(b) that would incorporate the 2017 legal opinion allowing for an “individual policy” to cover both the credit union and some CUSOs. A CUSO may be included in a FICU’s bond coverage if:

• • the FICU owns greater than 50% the CUSO, or
  • the CUSO is organized by the FICU for the purpose of handling certain of its business transactions and composed exclusively of its employees
• Sec. 713.4 – Bond Forms – current § 713.4(a) would be divided into 2 parts (a) and (b) restating the requirement for NCUA approval of bond forms and directing readers to NCUA’s website for the list of approved forms. In section 713.4(c), NCUA would clarify that any bond form that has been amended or changed since the Board approved it requires new approval from the Board as is the current policy/practice. The proposed rule would clarify the list of documents that must receive Board approval, including renewal forms (and any other document) that limit the coverage of approved bond forms.
• A new section 713.4(d) would sunset NCUA’s approval of all bond forms 10 years after approval given. However, NCUA notes that the 10-year period will not toll or start over when a bond carrier submits a revision to an approved bond. NCUA also proposes to reserve the right to review a bond form at any time, notwithstanding the 10-year sunset.
  In addition to seeking comments on the proposed changes to Parts 704 and 713 fidelity bond requirements, NCUA also seeks comments on whether FICUs anticipate any increase in compliance burden under the proposed rule.

  NASCUS Notes:
  As noted above, NCUA’s fidelity bind requirements applied in part to FISCUs by reference in § 741.201, which currently reads as follows:

§741.201   Minimum fidelity bond requirements.
(a) Any credit union which makes application for insurance of its accounts pursuant to title II of the Act must possess the minimum fidelity bond coverage stated in part 713 of this chapter in order for its application for such insurance to be approved and for such insurance coverage to continue. A federally insured credit union whose fidelity bond coverage is terminated shall mail notice of such termination to the Regional Director not less than 35 days prior to the effective date of such termination.

(b) Corporate credit unions must comply with §704.18 of this chapter in lieu of part 713 of this chapter.

NASCUS Comments: Regulatory Review (2019)

June 1, 2019

Office of the General Counsel
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314

Re: Regulatory Review (2019)

Via e-mail to [email protected]

To Office of the General Counsel,

The National Association of State Credit Union Supervisors (NASCUS)1 submits the following comments in response to the National Credit Union Administration’s (NCUA’s) request for comments on the 2019 Regulatory Review. We commend NCUA for reinstituting its rolling one-third annual review of its regulations pursuant to Interpretive Ruling and Policy Statements (IRPS)87-2, 03-2, 13-1, and 15-1.

The 2019 Regulatory Review covers NCUA’s Rules and Regulations Parts 700 through 710. These rules include 17 provisions applicable to federally insured state credit unions (FISCUs) by way of incorporation by reference in NCUA’s Part 741.

Consolidation of NCUA Title II Insurance Rules

The organization of NCUA Rules and Regulations creates unnecessary compliance burdens for FISCUs by failing to clearly convey what regulatory requirements apply to FISCUs. NCUA should reorganize its rules to consolidate all National Credit Union Share Insurance Fund (NCUSIF) rules for FISCUs in one section and all rules related to the federal charter in another. Reorganizing the rules in this manner would provide significant regulatory relief to credit unions without increasing risk to the NCUSIF.

NCUA’s notice for the 2019 Regulatory Review is one example of how NCUA’s current organization of its rules overly burdens not only FISCUs but all system stakeholders. Not all the provisions subject to comment in this year’s review apply to FISCUs. Therefore, a reader reviewing the notice on behalf of FISCUs has to spend an inordinate amount of time determining which provisions applied to FISCUs by researching every provision within Part 741 to identify any cross references to the rules subject to this year’s review.

To further complicate matters, in some cases the wording in Part 741 instructs FISCUs to comply with “applicable” provisions found elsewhere in NCUA’s rules.  Unless the adjective “applicable” is mere surplusage, this adjective distinguishes some provisions from others, by indicating that some provisions apply to FISCUs whereas other provisions do not apply to FISCUs.  Without any guidance in the form of a clear designation of the “applicable provisions,” however, the reader can only speculate how many applicable provisions there are, and what they might be.

For example, §741.202 reads, in part:2

• The supervisory committee of each credit union insured pursuant to title II of the Act shall make or cause to be made an audit of the credit union at least once every calendar year covering the period elapsed since the last audit. The audit must fully meet the applicable requirements set forth in part 715 of this chapter or applicable state law, whichever requirement is more stringent. (12 CFR 741.202)

The difficulty arises because Part 715 does not clearly indicate which provisions are applicable to FISCUs. One reasonable reading is that only the specific audit provisions of Part 715 apply and not the provisions speaking to the supervisory committee in general. The point is that the compliance obligations are unclear.

Another way in which the current organization of NCUA’s rules burdens stakeholders is when a cross reference in Part 741 references a discreet sub-part of a provision within a federal credit union rule comprised of numerous provisions. For example, the various sub-provisions of Part 701 applicable to FISCUs are scattered among different provisions in Part 741. Part 741.8 references §701.23(b)(i) and (b)(iii) but not (b)(ii). In addition, §741.8(b)(4) directs FISCUs to the loan participation definitions in §701.22 and refers to “meeting the requirements of §701.22” without any limitation to “applicable” requirements.  The implication of Paragraph 741.8(b)(4) might seem to be that all the requirements of §701.22 apply, but this implication is contradicted by §741.225, which definitely states that FISCUs “are exempt from the requirement in §701.22(b)(4).”  Thus, in a section far removed from §741.8(b)(4), the meaning of the phrase “meeting the requirements of §701.22” is, in at least one way, clarified.

Distinct provisions of Part 701 are also referenced elsewhere in Part 741.  For example, under §741.205, only “the requirements stated in §701.14(c) of this chapter concerning the prior notice and NCUA review” currently apply to any FISCU chartered for less than 2 years, or “defined to be in troubled condition as set forth in §701.14(b)(3).”  Under §741.221, “the requirements in §701.20” apply to a FISCU that undertakes “with its principal to pay or perform an obligation to a third person,” or “agrees to satisfy the obligation of the principal only if the principal fails to pay or perform.”  All of these subjects could be covered more coherently, comprehensively, and conveniently for the FISCUs if the provision were restated in Part 741.

To further complicate matters, the loan participation rule is also separately referenced in §741.225. In fact, distinct provisions of Part 701 are also referenced in §741.205, §741.221, §741.203, and §741.204.

That the organizational structure of such regulations currently is confusing and burdensome should be obvious.  Accordingly, NCUA should resolve the confusion and reduce regulatory burden by consolidating FISCU rules in their entirety in Part 741.

§701.21 Loans to Members and Lines of Credit to Members

NCUA’s regulations concerning loans applies to FISCUs, in part, by way of reference in §741.203. Part 701.21 provides another example of the confusion presented by NCUA’s practice of incorporation by reference. While the rule itself is extensive, only three sub-provisions apply to FISCUs.  However, on their face, those provisions themselves only refer to federal credit unions, once again creating confusion to the FISCU reader. To clarify the rule, we recommend Part 701.21(c)(8) be incorporated into Part 741 in its entirety.  At a minimum, NCUA should change the references within the sub-section (c) to include FISCUs.3

In addition, while §741.203 provides an exemption to the requirements of §701.21(c)(8) and (d)(5) if a state has adopted a substantially similar rule, the requirement for FISCUs to comply with §701(h) is contained in §741.203(c), which includes no provision allowing states to adopt substantially similar rules.  NCUA should extend the exemption provision for substantially similar state rules to include the third-party servicing provisions of §721(h).

Part 702 Capital Adequacy

With its risk-based capital rule scheduled to take effect on January 1, 2020, NCUA should work with stakeholders to publish a proposed supplemental capital rule for complex and low-income designated credit unions. In designing a supplemental capital framework for the risk-based capital rule, NCUA should focus on allowing subordinated debt instruments and design the framework in anticipation of eventual statutory changes to credit union capital requirements.

Allowing supplemental capital for credit union capital requirements would provide several tangible benefits to the credit union system:

1) It would allow for measured expansion of products and services without the dilution of regulatory capital. This could be especially beneficial to credit unions seeking to modernize and enhance member services to maintain competitiveness with other financial service providers.

2) It would empower a credit union’s members by allowing those members to recapitalize, or augment the capitalization of, their credit union. NCUA has often sought ways to “empower” members.4 Providing for members’ ability to directly recapitalize their credit union would be consistent with NCUA’s approach in that regard.

3) It would enable credit unions to attract additional capital that serves as a buffer for the share insurance fund, absorbing credit union losses in a first loss position and protecting the share insurance fund. To the extent that the goal of NCUA’s risk-based capital rulemaking is to increase the capital buffer protecting the share insurance fund, supplemental capital is wholly consistent with that rulemaking.

We note that NCUA has assured stakeholders that supplemental capital rulemaking would accompany final implementation of risk-based capital. In its preamble to the 2015 final RBC rule, NCUA wrote:

“[t]he Board plans to address comments supporting additional forms of supplemental capital in a separate proposed rule, with the intent to finalize a new supplemental capital rule before the effective date of this risk-based capital final rule.” 5

In a November 2015 report to Congress, NCUA assured Congress that “[a]s part of modernizing NCUA’s risk-based capital rule, the NCUA Board was unanimous in its commitment to move forward with a separate rulemaking to allow supplemental capital to be counted toward the risk-based capital ratio. The effective date of this proposed change would coincide with implementation of NCUA’s modernized risk-based capital rule scheduled for January 1, 2019.” 6

In addition to risk-based capital, NCUA has also communicated its intention to re-visit the regulatory framework related to secondary capital for low-income designated credit unions. NASCUS commends NCUA for this initiative and recommends that secondary capital rules incorporate concepts related to subordinated debt and supplementary capital.

Part 704 Corporate Credit Unions

NCUA’s corporate credit union rule applies in its entirety to state-chartered corporate credit unions by way of reference in §741.206. 7 After the recession and subsequent failure of several corporate credit unions exposed shortcomings in corporate credit union regulation and supervision, NCUA promulgated a comprehensive overhaul of §704, drastically limiting corporate credit union powers, homogenizing corporate credit union regulation, and imposing a new corporate credit union capital regime. 8 As a result, the corporate credit union system today is far smaller than it was in 2008. 9

In the years since the recession, the corporate credit union system has consolidated and stabilized. While giving due consideration to the lessons learned from the recession, NCUA should work with state regulators to perform a comprehensive review of Part 704 to identify rule changes that could help sustain the healthy growth of the overall credit union system. At the same time, the joint NCUA/State review could identify governance and other areas where NCUA preemption of state rules for corporate credit unions might be rolled back to provide an opportunity for regulatory diversity, and corporate credit union innovation, to strengthen the corporate system itself.

We recommend NCUA modernize § 704 in the following manner:

• Take steps to de-homogenize the corporate credit union system by providing for state regulatory diversification of corporate credit union rules.

NCUA could strengthen the corporate credit union system by allowing states to introduce variations on NCUA’s rules, thereby diversifying the regulatory framework of the corporate credit union system. Providing an opportunity for diversity of regulation between state and federal charters, within prudent safe and sound parameters, yields benefits to both charters, and contributes to a more vibrant credit union system. There comes a time when the very homogenous nature of the corporate credit union system, bereft of the cooperative competition of dual chartering, may itself pose a threat to the health of the system.

• Clarify that state-chartered corporate credit unions satisfy the compensation disclosure requirements by filing the IRS 990.

All state-chartered credit unions, including state-chartered corporate credit unions, are required to annually file an Internal Revenue Service Return of Organization Exempt from Income Tax (Form 990).10 The Form 990 is a publicly available document. NCUA should clarify that state-chartered corporate credit unions satisfy the requirements of this provision so long as the corporate’s Form 990 filing contains the information required by the provision, and access to the Form 990s is made available to the members. We note that with corporate credit unions the “members” in question are primarily institutional members (natural person credit unions) who themselves file, and understand, the Form 990 and the information it provides. Clarifying the ability of a corporate credit union to satisfy Part 704.19 with the filing of a Form 990 reduces regulatory burden, vindicates the spirit of the rule, and raises no safety and soundness implications.

• Provide corporate credit unions greater flexibility to serve as a liquidity source for natural person credit unions

Although a substantially smaller sector of the credit union movement than in the past, corporate credit unions still are an integral part of the system with 5,000 natural person credit union members. NCUA should work with state regulators to evaluate the risks and benefits of regulatory changes that would better position corporates to provide liquidity and other services to natural person credit unions. For example, modestly extending the term of the weighted average life requirements in §704.8(f) could allow corporates to provide longer funding options for natural person credit unions during times of stressed liquidity in the natural person credit union system. Consideration could also be given to extending the permissible term of corporate credit union secured borrowing.

NCUA should also consider regulatory and (and supporting statutory changes) to the process by which natural person credit unions may access the Central Liquidity Facility (CLF) to allow corporate credit unions to provide the access on behalf of their natural person credit union members.11 Part 704 should be amended to include rules for corporate credit unions to once again act as agents and become a direct members of the CLF. So doing would enable far more natural person credit unions to obtain meaningful access to CLF liquidity.

• Exempt state corporate credit unions from Part 704.14(a)(2) board representation

Part 704.14(a)(2) provides “[o]nly an individual who currently holds the position of chief executive officer, chief financial officer, chief operating officer, or treasurer/manager at a member credit union, and will hold that position at the time he or she is seated on the corporate credit union board if elected, may seek election or re-election to the corporate credit union board;”. When this provision was proposed in 2010, NASCUS wrote:

NASCUS also questions the utility of the proposed regulations. There is no evidence that mandating a director be a CEO, CFO or COO will result in enhanced board competence or function. Further, many highly talented potential directors from member entities may not hold the prescribed titles. For example, an economist or an attorney employed by a member entity could enhance the leadership of a particular corporate. While an individual corporate may decide to establish such criteria for its directors, that is a business decision for the individual corporate which should be guided by the institution’s own corporate governance framework.

• NASCUS comments on Proposed Rulemaking for Part 704 (March 5, 2010)12

We remain skeptical of this provision for the reasons stated in our March 2010 comment letter. This provision should be rescinded. At a minimum, state corporate credit unions should be exempted from this, and other, governance provisions in Part 704.

• NCUA should provide greater flexibility for corporate credit unions to invest in CUSOs and other fintech opportunities

Financial institutions around the world are investing heavily in financial technology to improve efficiencies, enhance member/customer experience, and compete against increasingly aggressive non-depository financial services technology companies. Corporate credit unions are not immune to these market-place pressures.

Part 704.11 should be revised to provide greater flexibility for corporate credit unions to engage in fintech development by reducing regulatory burden for non-material investments and enabling greater cooperation with natural person credit union CUSOs. One prevailing method by which companies gain an understanding of emerging fintech innovation is by making modest investments in the startup, thereby gaining visibility on its technological development.

§708a Bank Conversions and Mergers & §708b Mergers of Federally Insured Credit Unions; Voluntary Termination or Conversion of Insured Status

Recognizing that the Federal Credit Union Act grants NCUA the authority to promulgate rules for the merger of federally insured credit unions as well as conversion to non-credit union status, we continue to urge NCUA to read its statutory mandate with prudent regulatory restraint. With respect to FISCUs, NCUA should focus on safety and soundness, not on governance issues that are more appropriately subject to state chartering rules and regulations.

Accordingly, NCUA should limit application of both §708a and §708b to FISCUs to questions of safety and soundness and risk to the NCUSIF.13 For FISCUs, the manner and content of the notice to members, the means by which elections are conducted, vote thresholds, and other governance issues are matters for state law.

Historically, NCUA has failed to articulate a convincing safety and soundness rationale for applying many of the §708a and b governance provisions to FISCUs.14 The strength of the dual chartering system is that the different chartering authorities may hold different views of various issues. NCUA may not agree with a state’s view on mergers or charter conversion, but as the share insurer its only concern should be material risk to the NCUSIF.

NCUA’s implementation of its merger and conversion rules has also been problematic. Since the effective date of the 2018 merger rule, NASCUS has received comments from numerous state regulators who are frustrated with the rule’s implementation. Those frustrations include inconsistent messages from NCUA regarding the rule and unnecessary delays of common-sense mergers. Other administrative issues have plagued NCUA’s 2018 rulemaking. NCUA, by its own admission, only studied federal credit union mergers in preparing the rulemaking, despite the fact NCUA ultimately applied the rule to FISCUs. NCUA’s call for comments reflected this lack of attention to FISCUs, as it was worded for federal credit unions with only the question of applicability to FISCUs included almost as an afterthought. We believe the nature of NCUA’s comment call may have affected the volume of comments submitted with respect to submissions on behalf of FISCUs.

We urge NCUA to revisit its rulemaking with respect to FISCU conversions and mergers. NCUA should issue an Advance Notice of Proposed Rulemaking (ANPR) on the question of NCUSIF merger and conversion rules for FISCUs and engage in a meaningful discussion of the safety and soundness issues with stakeholders.

We thank NCUA for the opportunity to submit recommendations for improving its Rules and Regulations. NCUA is to be commended for continuing the rule review process. We would be happy to discuss all of our comments in detail at NCUA’s convenience.

Sincerely,

– signature redacted for electronic publication –

Brian Knight
Executive Vice President & General Counsel

NCUA 2019 Regulatory Review
Summary

Prepared by NASCUS Legislative & Regulatory Affairs Department
January 2019

NCUA has published its 2019 Regulatory Review covering 1/3 of its Rules & Regulations from Part 700 to Part 710. The Regulatory Review includes both federal credit union (FCU) only rules as well as rules that apply to federally insured state credit unions (FISCUs) by reference in Part 741.

NCUA’s Regulatory Review may be read here: https://www.ncua.gov/regulation-supervision/rules-regulations/regulatory-review.

Comments on the Regulatory Review are due to NCUA by June 1, 2019.

Summary

This year, NCUA will review the following rules as part of its administrative review :

1. 700                  Definitions
2. 701.1               FCU Chartering, Field of Membership Modifications, and Conversions
3. 701.2               FCU Bylaws
4. 701.3               Member Inspection of Credit Union Books, Records, and Minutes
5. 701.4             General Authorities and Duties of FCU Directors
6. 701.6              Fees Paid by FCUs
7. 701.14             Change in Official or Senior Executive Officer in Credit Unions that are Newly                                Chartered or are in Troubled Condition (by way of §741.205)
8. 701.19             Benefits for Employees of FCUs
9. 701.20            Suretyship and Guaranty (by way of §741.221)
10. 701.21            Loans to Members and Lines of Credit to Members (by way of §741.203)
11. 701.22            Loan Participations (by way of §741.8 & §741.225)
12. 701.23            Purchase, Sale, and Pledge of Eligible Obligations (by way of §741.8)
13. 701.24             Refund of Interest
14. 701.26             Credit Union Service Contracts
15. 701.30             Services for Nonmembers Within the Field of Membership
16. 701.31            Nondiscrimination Requirements
17. 701.32             Payment on Shares by Public Units & Nonmembers (by way of §741.204)
18. 701.33             Reimbursement, Insurance, and Indemnification of Officials and Employees
19. 701.34            Designation of Low-Income Status; Acceptance of Secondary Capital(by way of                             §741.204) Accounts by Low-Income Designated Credit Unions
20. 701.35             Share, Share Draft, and Share Certificate Accounts
21. 701.36             FCU Ownership of Fixed Assets
22. 701.37             Treasury Tax and Loan Depositaries; Depositaries and Financial Agents of the                                Government
23. 701.38             Borrowed Funds from Natural Persons
24. 701.39             Statutory Lien
25.  Appendix A to Part 701 – FCU Bylaws
26. Appendix B to Part 701 – FCU Chartering and Field of Membership Manual
27. 702                 Capital Adequacy (by way of §741.3)
28. 703                 Investment and Deposit Activities (by way of §741.3 & §741.219)
29. 704                 Corporate Credit Unions (by way of §741.3)
30. 705                 Community Development Revolving Loan Fund Access for Credit Unions (by way                         of §741.207)
31. 707                 Truth in Savings (by way of §741.217)
32. 708a               Bank Conversions and Mergers (by way of §741.208)
33. 708b               Mergers of Federally-Insured Credit Unions; Voluntary Termination or Conversion                         of Insured Status (by way of §741.208)
34. 709                 Involuntary Liquidation of Federal Credit Unions and Adjudication of Creditor                                Claims Involving Federally Insured Credit Unions in Liquidation (by way of                                     §741.218)
35. 710                 Voluntary Liquidation (Only 710.9)

Summary: NCUA Proposal, Part 715
Supervisory Committee Audits and Verifications
(By reference in §741.6 and §741.202)

Prepared by NASCUS Legislative & Regulatory Affairs Department
March 2019

NCUA is proposing changes to its regulations governing supervisory committee and other audits.  NCUA’s audit rules are found in NCUA’s Rules and Regulations Part 715. For federally insured state credit unions (FISCUs), Part 715 is referenced in Parts 741.6 and 741.202. Specifically, §741.6 requires FISCUs submit financial reports to NCUA in the manner, and by the means, prescribed by the agency. The provision requires FISCUs file required reports consistent with generally accepted accounting principles (GAAP) if the FISCU has assets in excess of $10 million. The provision incorporates the definition of GAAP found in §715.2(e) and the definition of generally accepted auditing standards (GAAS) found in §715.2(f). Part 741.202, applying to FISCUs, states:

(a) The supervisory committee of each credit union insured pursuant to title II of the Act shall make or cause to be made an audit of the credit union at least once every calendar year covering the period elapsed since the last audit. The audit must fully meet the applicable requirements set forth in part 715 of this chapter or applicable state law, whichever requirement is more stringent.

(b) Each credit union which is insured pursuant to title II of the Act shall verify or cause to be verified, under controlled conditions, all passbooks and accounts with the records of the financial officer not less frequently than once every 2 years. The verification must fully meet the requirements set forth in §715.8 of this chapter.

NCUA’s proposed rule may be read here. The proposed rule is open for comment until April 26, 2019.

Summary

Section 202(a)(6)(A) of the FCU Act authorizes the NCUA to prescribe audit standards that require an outside, independent audit by a certified public accountant for any fiscal year for which a credit union has not conducted an annual supervisory committee audit, has not received a complete and satisfactory supervisory committee audit, or during which the credit union has experienced persistent or serious record keeping deficiencies.

Section 202(a)(6)(D) of the FCU Act requires larger FICUs having assets of $500 million or more to obtain an annual independent audit of its financial statements performed in accordance with generally accepted auditing standards (GAAS). That audit must be performed by an independent certified public accountant or licensed public accountant.

NCUA’s audit rules are in Part 715 of their rules and regulations. Specifically, §715.5 and §715.6 establish: (1) the minimum type of annual audit a FICU is required to obtain according to its charter type and asset size; (2) the licensing requirements of persons performing certain audits; and (3) the auditing principles that apply to certain audits. In addition, §715.7 allows FICU to comply with the annual audit requirement if it has elected not to voluntarily obtain a financial statement audit by obtaining:

(1) a Balance Sheet Audit
(2) a Report on Examination of Internal Controls over Call Reporting
(3) an Audit per the Supervisory Committee Guide

The first two options are analogous to options adopted in 1999 by the Federal Financial Institutions Examination Council for other federally insured financial institutions. The third option was clarified by NCUA in 1999 when the agency amended the Supervisory Committee Guide to detail the minimum scope and procedures for an audit distinct from a financial statement audit.

NCUA’s Proposed Change

Part 715.7 Supervisory Committee Audit Alternatives to a Financial Statement Audit

NCUA proposes eliminating references to the Supervisory Committee Guide as an audit alternative. NCUA would replace a Supervisory Committee Guide audit with an option to conduct an audit so as to meet certain minimum requirements incorporated into a proposed new Appendix A to Part 715.

Under the proposed new Appendix A, the supervisory committee, internal auditor, or other qualified person would be required to perform and document the following areas of review:

• Test and confirm material asset and liability accounts, including, at a minimum, loans, cash, investments, shares and borrowings
• Test material equity, income and expense accounts
• Review key internal controls, at a minimum, bank reconciliation procedures, cash controls, dormant account controls, wire and ACH transfer controls, loan approval and disbursement procedures, and inside account controls
• Test the mathematical accuracy of the allowance for loan and lease loss accounts and ensure the methodology is properly applied
• Test loan delinquency and charge-off

In addition to the proposed changes, NCUA is seeking comment on whether other areas should be included in Appendix A such as loans to insiders, pay and benefits to employees and board members, regulatory compliance, compliance with the Bank Secrecy Act, or other topics.

Part 715.9 Assistance from Outside, Compensated Person

NCUA proposes amending §715.9(c)(6), the provision addressing engagement letters a credit union may use to hire a compensated auditor to perform audit functions. Current NCUA rules require credit unions stipulate audit reports must be completed and delivered no later than 120 after the calendar year end for which the audit was performed.

NCUA proposes eliminating the specified 120-day target date. The new standard would only require a credit union specify in the engagement letter a target delivery date that enables it to meet its §715.4 annual audit requirements. NCUA intends the proposed changes will:

• Provide credit unions greater ability to negotiate the target date for delivery of audit reports
• Eliminate the need for a Supervisory Committee to obtain a waiver from NCUA for audit reports exceeding the 120-day period

Supervisory Committee Guide

NCUA proposes amending §715.9(c)(3), §715.9(d), and §715.9(e) to remove references to the Supervisory Committee Guide. NCUA will revoke the Supervisory Committee Guide and replace it with minimum requirements in a new Appendix A consistent with the proposed changes to §715.7(c).

NCUA will also amend §715.7 by removing a current option a credit union has to obtain “a report on examination of internal controls over call reporting” as an alternative to obtaining a financial statement audit. NCUA believes this option is of limited value and has been used by less than 1% FICUs.

Balance Sheet Audit Alternative

NCUA seeks comment on whether it should also eliminate the “balance sheet audit” alternative. It has been the NCUA’s experience that the balance sheet audit alternative is utilized only by a small number of credit unions (approximately 2.5 percent) and provides limited value, as it does not include an audit of a credit union’s income statement.

Delaware does not have a state credit union statute and has no state-chartered credit unions. Please visit one of our other states for the latest news on the state credit union system.

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Summary: Overdraft Rule Review Pursuant to the Regulatory Flexibility Act

12 CFR Part 1005

Consumer Financial Protection Bureau
Prepared by the NASCUS Legislative & Regulatory Division
May 2019

The Consumer Financial Protection Bureau (Bureau) is conducting a review of the 2009 Overdraft rule in compliance with Section 610 of the Regulatory Flexibility Act.  The Bureau is seeking comment on the economic impact of the overdraft rule on small entities.  The Bureau intends to use the comments received to determine whether the rule should be continued without change or amended/rescinded to minimize significant economic impact on small entities.

The RFA request for comments can be found here.  Comments are due to the Bureau no later than July 1, 2019.

Summary

The Overdraft Rule was issued in 2009 and limits the ability of financial institutions to assess overdraft fees for paying automated teller machine (ATM) and one-time debit card transactions that overdraw consumer accounts.

Under the Regulatory Flexibility Act (RFA), agencies are required to consider the effect on small entities for certain rules.  Section 610 of the RFA requires agencies to publish a plan for periodic review of rules that will or have had a significant economic impact on small entities.  During the RFA review, agencies are required to consider the following factors:

• The continued need for the rule;
• The nature of public complaints or comments on the rule;
• The complexity of the rule;
• The extent to which the rule overlaps, duplicates or conflicts with Federal, State or other rules; and
• The time since the rule was evaluated or the degree to which technology, market conditions, or other factors have changed the relevant market.

The Bureau is requesting feedback on the following:

• The nature and extent of the economic impacts of the Rule as a whole and of its major components on small entities, including impacts of the reporting, recordkeeping, and other compliance requirements of the Overdraft Rule, as well as benefits of the Rule;
• Whether and how the Bureau by rule could reduce the costs of the Overdraft Rule on small entities, consistent with state objectives of EFTA and the Overdraft Rule; and
• Any other information relevant to the factors that the Bureau considers in completing a Section 610 Review under the Regulatory Flexibility Act.

Summary: Proposed rule with request for comments re: the Home Mortgage Disclosure Act

12 CFR Part 1003

Consumer Financial Protection Bureau

Prepared by the NASCUS Legislative & Regulatory Division

May 2019

The Consumer Financial Protection Bureau (Bureau) is proposing two alternatives to amend Regulation C to increase the origination threshold that would trigger HMDA compliance requirements for closed-end mortgage loans.  In addition, the proposal would extend the temporarily increased origination threshold for open-end lines of credit as well as set a higher permanent origination threshold for open in lines of credit.

The proposed rule can be found here.  Comments on the proposed rule are due to the Bureau by June, 12, 2019.  Comments on the Paperwork Reduction Act analysis in Part VIII of the Supplementary Information are due to the Bureau no later than July 12, 2019.

Summary

The Home Mortgage Disclosure Act (HMDA) provides for institutional and transactional coverage thresholds that determine whether certain financial institutions are required to collect, record and report any HMDA data on closed-end mortgage loans or open-end lines of credit.  The Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA) provides partial exemptions from HMDA requirements for certain insured depository institutions (including credit unions).  In 2015, the Bureau determined that institutions that originated: (i) at least 25 closed end mortgage loans in each of the two preceding calendar years or (ii) at least 100 open-end lines of credit in each of the two preceding calendar years would be required to collect, record and report HMDA data.  The Bureau then issued an updated HMDA rule in 2017 that temporarily increased the open-end line of credit threshold to 500 open-end lines of credit for calendar years 2018 and 2019.

The Bureau is now proposing amendments to Regulation C that would increase the closed-end mortgage loan origination threshold that would trigger HMDA requirements.  Under the proposal, institutions originating fewer than either 50 closed-end mortgage loans or alternatively 100 closed-end mortgage loans, in either of the two preceding calendar years would not have to report such data as of January 1, 2020.  The proposal would also adjust the threshold for reporting data about open-end lines of credit by extending the current temporary threshold of 500 open-end lines of credit until January 1, 2020.  After that date, the open-end lines of credit threshold will be set to 200.  The proposal would also incorporate into Regulation C the interpretations/procedures from the interpretive/procedural rule the Bureau issued on August 31, 2018.

The Bureau is seeking comments on the following among other things:

• On whether the data that would be reported at thresholds of 50 or 100 closed-end mortgage loans would achieve the purposes of HMDA?
• On whether other closed-end and open-end coverage thresholds may be appropriate?
• Whether the value of the data that would be reported by institutions that originate between 25 and 50 closed-end mortgage loans or alternatively between 25 and 100 closed end mortgage loans is outweighed by the burden on those institutions of reporting HMDA data and undergoing examinations to validate the accuracy of their submissions?
• How the proposed increase to the closed-end coverage threshold to 50, 100 or another number would affect the number of depository institutions required to report data on closed end mortgage loans?
• The significance of the data that would not be available for achieving HMDA’s purposes as a result of the proposed increase to the closed-end coverage threshold to 50, 100 or another number?
• The reduction in burden that would result from the proposed increase for institutions that would not be required to report (addressing separately the burden reduction for depository institutions that are eligible for the EGRRCPA’s partial exemption for closed-end mortgage loans and the burden reduction for depository institutions that are not)?
• Whether it should extend the temporary institutional coverage threshold of 500 open-end lines of credit as proposed, and if so, for how long?
• Whether to increase permanently the open-end institutional coverage threshold when the proposed temporary extension expires? And, if so, whether a threshold of 200 or some other threshold would most appropriately balance the benefits and burdens of covering institutions based on their open-end lending beginning in 2022?
• How the proposed temporary and permanent increases would affect the number of financial institutions required to report data on open-end lines of credit?
• The significance of the data that would not be available as a result of the proposed temporary and permanent increases?
• The reduction in burden that would result from the proposed temporary and permanent increases for institutions that would not be required to report their open-end lines of credit (addressing separately the burden reduction for institutions that are eligible for the EGRRCPA’s partial exemption for open-end lines of credit and for institutions that are not)?