Dec. 6, 2019 NASCUS Report

THIS WEEK: Hood stands behind CU bank purchases … notes ‘subordinated debt’ proposal still on drawing board; Board to consider RBC delay, higher OTR; ‘2nd chance’ takes effect in New Year; Regulators OK alternative data underwriting; Proposal allows remittance fee estimates; Summary looks at TRID RFI; Cannabis bill shifts to 2020; ON THE ROAD: In FL and TN; TRANSITIONS: New FL commissioner tapped; BRIEFLY: March 3 for CFPB case before high court, banking agencies follow NCUA’s hemp lead.

Hood talks up strength, inclusion;
backs CU purchases of banks

While the comments of NCUA Board Chairman Rodney Hood before a House committee this week largely focused on three areas – safety and soundness, diversity and inclusion and cybersecurity – the subject of credit unions buying banks also came up, triggered by members of the committee.

The following day in front of a Senate committee, the NCUA leader said work still continues on a proposal for subordinated debt for credit unions – but he gave no timetable for issuing the proposal (see following item).

In testimony before the House Financial Services Committee – which included three of the four federal financial institution regulators appearing in an oversight hearing – Hood told the committee that credit unions are “solid and healthy,” as is the National Credit Union Share Insurance Fund (NCUSIF). He also outlined the agency’s efforts to foster diversity and inclusion, reiterating his view that financial inclusion is the “civil rights issue of our time.” Regarding cybersecurity, Hood noted that it is a high priority for him as chairman. “Cyber attacks are acute and we are making sure we leverage our resources to provide credit unions with the support they need to combat these challenges,” he said.

But members of the House committee seemed interested in the continuing trend of credit unions purchasing banks, perhaps prompted by the news this week of a proposed credit union purchase of the largest bank to date. At least two industry news organizations reported that Suncoast CU of Tampa, Fla. (the largest credit union in the state with $10.4 billion in assets) is in negotiations to purchase Apollo Bank of Miami, Fla. (with $745 million in assets). Reportedly, the bank purchase would be the largest ever by a credit union.

(In the brief video, NCUA’s Rodney Hood and FDIC’s Jelena McWilliams tell Blaine Luetkemeyer (R-Mo.) of the House Financial Services Committee about their views of credit union purchases of banks; click on arrow to play.)

Committee Member Blaine Luetkemeyer (R-Mo.) told Hood and FDIC Chairman Jelena McWilliams (also testifying before the House committee) that he was concerned a war was going to break out between credit unions and banks over the purchase of banks by CUs. “Are you guys at all concerned,” Luetkemeyer asked. Hood said that the credit union purchase of a bank was simply a “market-based transaction.” McWilliams, on the other hand, indicated that her agency did have some concerns. “We are looking at this,” she said.

Later, Rep. Bill Huizenga (R-Mich.) asked the two regulators if they “see any problem” with the purchases of the for-profit institutions by the not-for-profits. Hood (responding in a similar manner as he did to the previous question) indicated he saw no problem with the transactions.

But McWilliams was more circumspect. She said she was concerned about communities losing banks. She said Congress set up credit unions in a certain way – “they are not subject to taxation and they also don’t have CRA requirements,” she asserted – and indicated that there may be a problem.

She said that “the playing field may not be exactly level” between credit unions and banks.

Subordinated debt proposal ‘complex issue’

In testimony before the Senate Banking Committee the following day, Hood told panel Chairman Mike Crapo (R-Idaho) that NCUA continues to work on a proposal for making subordinated debt available for certain credit unions to meet their risk-based capital requirements.

“This has proven to be a very complex issue,” Hood said, adding that the agency continues to work on a proposal. He noted that federally insured credit unions already hold a relatively strong capital position (at about 11.39%), and that “I want to introduce other tools to further buttress that level of capital.” Hood indicated that the agency is still studying how to make a proposal work for credit unions, adding that “we want to get it right before giving it to stakeholders for comment.”

Hood gave no timetable for when a proposal would be issued.

In September, Hood said that, by the end of this year, he planned to bring before the NCUA Board a proposed rule to allow subordinated debt to be counted as regulatory capital for a broader range of credit unions. His comments this week indicated that timetable may have slipped.

NASCUS has long held that subordinated debt should be a part of the risk-based capital framework because it encourages well-managed credit unions to attract additional loss-absorbing forms of capital that they would otherwise forego. NASCUS President and CEO Lucy has noted that “the point of risk-based capital rulemaking is to increase the capital buffer standing before the share insurance fund and subordinated debt is wholly consistent with that goal.”

Board to consider higher OTR, RBC delay

Final consideration of its 2020-21 budget, and a final rule delaying the implementation of risk-based capital for credit unions, are on the agenda for the NCUA Board’s final regular monthly meeting of the year next week.

The NCUA budget, as proposed, includes an increase in the overhead transfer rate (OTR) for all federally insured credit unions to 61.3% for 2020, up from 60.5% for 2019 – and the first increase in three years (something NASCUS President and CEO Lucy Ito said is of concern to the association).

In fact, at an NCUA briefing about the budget last month, Ito laid out the key points on behalf of the state system during a presentation. Specifically, she said the state system urges NCUA to consider:

  • Providing greater transparency about what drove the OTR down in 2018, down in 2019 — but up in 2020.
  • Adopting better proportionality in distributing the OTR among all credit unions, in order to approximate greater equity of the OTR methodology overall.
  • Re-visiting the cost allocation of NCUA’s supervision of CUSOs and third parties under the OTR, in particular by allocating at least 25% of the agency’s CUSO and third party workload hours to NCUA’s safety and soundness responsibility as charterer/prudential regulator of federal credit unions.

In other action, the board is slated to consider a final rule delaying a “risk-based capital” (RBC) rule for federally insured credit unions to 2022. If made final, the postponement would be the second for the rule, which was first finalized in 2015. NCUA’s Rodney Hood has said delaying the rule to more than two years from now would allow the agency to take a “surgical approach” to implementing the rule “in a coordinated manner.”

“It also would give the agency time to consider additional improvements to credit union capital standards, such as subordinated debt authority, capital treatment for asset securitization, and a community bank leverage ratio equivalent for credit unions,” he wrote in a six-month “progress report” he issued in October.

In its comment letter on the issue posted in July, NASCUS said it supported the delay to 2022 to give NCUA sufficient time to address related capital issues, but also urged the agency to, in the meantime, fix flaws in the rule and develop an “alternative capital” option for credit unions (through subordinated debt), the association wrote in its official comment letter.

In its letter, NASCUS urged the agency to work with state regulators “expeditiously” to propose a rule on subordinated debt (a vehicle to provide credit unions with an option for raising additional capital), concurring that the effective date of the rule should be delayed until subordinated debt rules – and other issues — are finalized.

(At a hearing this week, NCUA’s Rodney Hood indicated the agency continues to work on the subordinated debt rule; see story above.)

“While NASCUS recognizes and respects the supervisory consensus that a risk-based capital framework is a necessary element of a robust regulatory system, we must support delaying the effective date at least until the subordinated debt rules are finalized, appropriate guidance issued, and Call Report changes are published,” NASCUS wrote. “Although this delay may result in controversy, it is necessary to remain consistent with the NCUA’s well-founded commitment to include elements that are not yet complete.”

The NASCUS letter acknowledged that the latest delay for the risk-based capital rule – if adopted, it would be the third such delay adopted by the rule since the rule itself was embraced by the agency in 2015 – inserts a degree of uncertainty for credit union management. Providing certainty, NASCUS indicated, may come from NCUA entirely repealing the rule and starting over.

The board is scheduled to meet on Thursday (Dec. 12) at 10 a.m. in Alexandria, Va.; the session will also be live-streamed via the Internet.

NASCUS Comments on Proposed Rule: Risk-Based Capital – Delay of Effective Date

Six-Month Progress Report of Chairman Rodney E. Hood

Proposed Rule: Risk-based Capital – Effective Date Delay

‘2nd chance initiative’ takes effect Jan. 2

NCUA’s “second-chance initiative,” issued as an interpretive ruling and policy statement (IRPS), takes effect Jan. 2, following its publication this week in the Federal Register. The IRPS removes the requirement that persons convicted of minor offenses — including those who were young adults at the time — would no longer need a waiver from the agency to obtain a job at a credit union. The NCUA Board adopted the final version of the initiative at its November board meeting. As adopted, the rule means that persons with convictions or program entries for offenses involving insufficient funds checks of aggregate moderate value, small dollar simple theft, false identification, simple drug possession, and isolated minor offenses committed by covered persons as young adults will not require an application for a waiver from the NCUA to serve at a credit union.

Final interpretive ruling and policy statement 19-1.

Regulators back alternative data underwriting

The value of information not typically found in a consumer’s credit report, used against the backdrop of a well-designed compliance management program, is recognized as potentially helpful in credit underwriting in a statement issued jointly this week by NCUA and four other federal financial institution regulatory agencies.

The statement – which included NCUA and the Federal Reserve, CFPB, FDIC, and OCC – is focused on the consumer protection implications of the use of alternative data in underwriting, highlighting potential benefits and risks. In the statement, the regulators said they “recognize that use of alternative data may improve the speed and accuracy of credit decisions and may help firms evaluate the creditworthiness of consumers who currently may not obtain credit in the mainstream credit system.” They noted that alternative data include cash flow data derived from consumers’ bank account records.

A well-designed compliance management program, the agencies stated, “provides for a thorough analysis of relevant consumer protection laws and regulations to ensure firms understand the opportunities, risks, and compliance requirements before using alternative data.” The agencies pointed to fair lending laws (such as the Equal Credit Opportunity Act), prohibitions against unfair, deceptive, or abusive acts or practices, and the Fair Credit Reporting Act.

Federal Regulators issue joint statement on the use of alternative data in credit underwriting

Proposal would allow for remittance fee estimates

Some credit unions and banks could estimate certain remittance fee and exchange rate information – instead of disclosing exact amounts in certain circumstances – under a proposal issued by the CFPB this week.

The proposal would also increase the “safe harbor” threshold to 500 or fewer annual transfers (from 100 transfers or less) for determining whether a financial institution is subject to the rule.

The bureau’s notice of proposed rulemaking would require companies that provide remittance transfers in the normal course of business to disclose to consumers certain fees and the exchange rates that apply to transfers. However, it also includes the exception that allows some banks and credit unions to estimate certain fee and exchange rate information instead of disclosing exact amounts in certain circumstances. The estimates would be allowed when conditions make it economically infeasible for those institutions to provide exact disclosures, the agency said. “This could preserve consumers’ ability to send remittances from their bank accounts to certain destinations and reduce the compliance burden for banks and credit unions,” CFPB said.

However, CFPB points out the exception expires by statute in July 2020.

In addition, CFPB said it is proposing to increase the safe harbor threshold that determines whether a company makes remittance transfers in the normal course of its business and is subject to the rule. “Under the proposal, companies making 500 or fewer transfers annually in the current and prior calendar years would not be subject to the rule,” the agency said. “This would reduce the burden on over 400 banks and almost 250 credit unions that send a relatively small number of remittances – less than .06% of all remittances,” the bureau said.

Consumer Financial Protection Bureau Issues Notice of Proposed Rulemaking on Remittance Rule

Summary looks at RFI for TRID

A new summary about the CFPB’s latest “request for information” – this one on integrated mortgage disclosures under the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA), together known as TRID  – is now available on the NASCUS website. The summary is open to members only.

Late last month, the bureau said it is seeking public comment on its assessment of TRID with comments due Jan. 21.

The bureau said its assessment is aimed at gauging the TRID rule’s effectiveness in “meeting the purposes and objectives of Title X of the Dodd-Frank Act, the specific goals of the rule, and other relevant factors.” CFPB said it wants public comment on the feasibility and effectiveness of its assessment plan, recommendations to improve the plan, and recommendations for modifying, expanding, or eliminating the TRID rule, among other things.

NASCUS Summary: Request for Information Regarding the Integrated Mortgage Disclosures under RESPA and TILA Assessment (members only)

Time runs out this year for Senate cannabis bill

Cannabis legislation won’t be forthcoming this year, at least from the Senate, the chairman of a key committee indicated this week. Senate Banking Committee Chairman Mike Crapo (R-Idaho) told a Washington publication this week that he does not (yet) have the votes necessary for the legislation – which would give state-authorized, cannabis-related businesses access to credit union or bank services without the financial institution having to fear federal prosecution for doing so.

In September, the House passed the Secure and Fair Enforcement (SAFE) Banking Act (H.R. 1595). A week later, Crapo said (taking notice of the 321-103 vote) that he expected “good support” for legislation in the Senate. His view, now, is apparently changed.

“We don’t have the politics yet where we can actually do a markup and pass a bill and be able to get the votes on the floor,” Crapo said. “I’m working on it.” The committee chairman said he doesn’t need unanimous support from his committee to send a similar bill to the Senate floor – but he does need bipartisan support to avoid a filibuster. He also said that he is working to build a bipartisan coalition around three key areas in his bill dealing with protections for interstate commerce, money laundering and general health and safety.

The House bill, as passed, would bar federal financial institution regulators from taking several actions against credit unions and banks serving legal cannabis-related businesses solely because the institutions are providing services to cannabis businesses, including prohibiting, penalizing, or discouraging a bank or credit union from providing financial services to (first) a cannabis-related legitimate business or (second) to a state (and its political subdivisions or Indian Tribe) that exercises jurisdiction over cannabis-related legitimate businesses.

ON THE ROAD: In FL with League leaders; in TN with directors

(At top) Regulators and leaders from state associations/leagues participated in a session during the American Association of Credit Union Leagues (AACUL) meeting in Florida this week, to discuss their perspectives on issues affecting credit unions, and the overall value of the state credit union system. Clockwise from top left: Texas CU Commissioner and NASCUS Chairman John Kolhoff listens to a question from Cornerstone League CEO Caroline Willard; North Carolina Credit Union Administrator and NASCUS Vice Chairman Rose Conner shares a lighter moment with Carolinas League CEO Dan Schline; AACUL Executive Director Brad Miller sets the table for the discussion; Oregon Division of Financial Regulation Credit Union Manager and NASCUS Treasurer-Secretary Janet Powell and Northwest Credit Union Association CEO Troy Stang listen to comments from the crowd. The NASCUS Regulator Board and Credit Union Advisory Council co-located their Strategic Planning Session with AACUL’s Winter Meeting while in Florida.

(At bottom) NASCUS Credit Union Advisory Council Member Jeff Dahlstrom leads a session during this week’s NASCUS Tennessee Directors College in Nashville. The one-day session (open to credit union board and committee members, and management) covered a variety of topics, including elder financial exploitation, indirect lending, national issues and more. It was co-sponsored with the Tennessee Department of Financial Institutions. Dahlstrom, in addition to his service on the NASCUS CU Advisory Council, is also president of Southeast Financial Credit Union in Nashville.

TRANSITIONS: New commissioner tapped in FL

Russell Weigel, a securities attorney from Coral Gables, is reportedly the new commissioner for the Florida Office of Financial Regulation. He succeeds Ronald Rubin in the position, who was fired by Gov. Ron DeSantis (R) in July. Weigel was named to the position by the governor and a panel of members from his state cabinet. According to the Tampa Bay Times, Weigel spent 11 years as a federal Securities and Exchange Commission (SEC) enforcement attorney (as stated in his application), serving in management, investigation and litigation roles. He is a graduate of Vanderbilt University and the University of Miami School of Law. He also briefly served as a Florida assistant state attorney, pursuing criminal prosecutions, before joining the SEC.

BRIEFLY: High court sets March 3 for CFPB hearing; banking agencies follow NCUA lead on hemp

The future of the CFPB will be at the forefront at a March 3 hearing by the Supreme Court of a case questioning the agency’s constitutionality. The high court will hear oral arguments in the case Seila Law v. CFPB, which focuses on the structure of the agency. Under a provision in the Dodd-Frank law creating the bureau, the agency’s director may only be removed by the president for cause. The case challenges the constitutionality of that provision … the federal banking agencies this week followed the lead of NCUA on hemp banking, issuing a statement that banks are no longer required to file suspicious activity reports (SAR) for customers solely because they are legally growing or cultivating hemp. State banking regulators joined in signing the statement. In August, NCUA issued guidance stating that said credit unions will be able to “provide the customary range of financial services” for business accounts, including loans, to lawfully operating hemp-related businesses within their fields of membership.

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