‘Alternative capital’ proposal issued
A proposal for “alternative capital” at credit unions – long sought by NASCUS — was issued for comment by the NCUA Board at its Thursday meeting, in a short but significant session. In issuing an “Advanced Notice of Proposed Rulemaking” (ANPR) for 90 days, NCUA Board Chairman Rick Metsger noted that he had “no preconceived notions” about the proposal, which covers both supplemental capital and secondary capital. “There are many different ways to structure capital,” he said, also noting that there are many side issues to consider, including structure, ownership, and tax implications (“especially for state credit unions”).
Board Member Mark McWatters noted that the proposal is the agency’s “first full-bore attempt at addressing this issue.” He noted that NCUA is taking a very careful approach; as an example, he pointed out that the agency has hired outside counsel to address securities issues related to alternative capital at credit unions.
In its summary, the agency explained that the ANPR includes two different categories (secondary and supplemental capital), and contemplates changing the secondary capital regulation for low income-designated credit unions (the only credit unions the FCU Act allows to have the capital form), but authorizing other credit unions to issue supplemental capital instruments that would only count toward the risk-based net worth requirement.
The 50-page ANPR document has eight sections of “supplementary information,” which includes current and prospective use of alternative capital, supplemental capital legal authority (and potential taxation implications), securities law applicability and “other investor considerations.”
ISSUES SPECIFIC TO STATE SYSTEM NOTED IN PROPOSAL
With regard to state credit unions, the ANPR states that it can “entertain” removing the borrowing limit for federally insured state chartered credit unions of 50% of paid-in and unimpaired capital and surplus. Noting that NCUA regulations provide the ability for state credit unions to obtain a waiver up to the amount of borrowing allowed under state law, the ANPR points out that the NCUA Board “is not aware of any federally insured state chartered credit unions that have requested a waiver to the borrowing limit in the past decade. While authority to issue alternative capital instruments for federally insured state chartered credit union is determined under state law, it is possible that some states will only allow their credit unions to issue alternative capital instruments under applicable borrowing authority.” The board said it is requesting comments on removing the borrowing limit.
The ANPR also includes a section on “potential taxation implications,” particularly for state-chartered credit unions. Noting that federal law provides a tax exemption for state credit unions that are “without capital stock” (and “organized and operated for mutual purposes without profit”), it also notes that – under current regulations – “there does not appear to be an established definition of ‘capital stock’ used by the IRS.” (There is no similar qualification in the tax exemption for federal credit unions.) “It is possible federally insured state chartered credit unions in some states will have broad authority to issue supplemental capital instruments that have the characteristics of capital stock, and by doing so could subject themselves to taxation,” the agency states.
Thus, NCUA said it is seeking comments about whether it should limit the types of supplemental capital instruments issued by federally insured state chartered credit unions to those that would clearly not meet the definition of capital stock. Other options to consider, the agency stated, include requiring a federally insured state chartered credit union to provide a formal opinion from the IRS that the supplemental capital instrument it is issuing will not be classified as capital stock. Another could be to require the credit union to provide projections in advance of issuing the supplemental capital, designed to demonstrate that the credit union can afford to be taxed and that “the benefits of the supplemental capital outweigh the cost of any taxes it might become subject to.”
STATE SYSTEM ‘ENCOURAGED’ BY CAPITAL PROPOSAL
NASCUS President and CEO Lucy Ito said the state system is encouraged by the agency’s action Thursday. In a statement, the NASCUS leader said that the proposal ” holds the potential for synchronizing federal rules with existing authorities already on the books for credit unions in 15 states, which is a long-time goal of NASCUS,” she said. “There is much to be considered in the 50-page proposal, particularly the challenges it outlines. The state system, however, believes that these challenges can be overcome — and that credit unions will ultimately have access to the tools they need to maintain safe capital levels during good and bad economic times.”
SLIGHT ‘INFLATION-ADJUSTED’ INCREASES FOR PENALTIES PROPOSED
In other action, the board issued for a 30-day comment period an interim final rule on civil money penalties adjusted for inflation. According to the agency, the penalties being proposed for 2017 are 1.6% higher than the maximum levels in 2016. The adjustment is required under statute; the last adjustment was June, 2016. NCUA pointed out that Congress changed federal law in November 2015 to require annual adjustments; previously, the adjustments were made every four years. While not required to do so, the agency is seeking comments on the statutorily required adjustments. NASCUS’ Ito commended the agency for doing so, noting a comment period displays receptivity to stakeholder input and sets a healthy precedent for inviting dialogue.
SUMMARY OUTLINES ‘SUPERVISORY PRIORITIES’ FOR FEDERAL AGENCY IN ‘17
NCUA’s first “letter to credit unions” for the year – outlining the regulatory agency’s priorities for 2017 – is summarized by NASCUS and now available on the website (members only). The letter (LTCU 17-CU-01, issued late last week) targets cybersecurity and BSA compliance as its top priorities. It notes that NCUA “plans to increase our emphasis on cybersecurity by enhancing the examination focus with a structured assessment process,” which it said it anticipates completing this process late this year. In the meantime, the agency said it will continue to carefully evaluate credit unions’ cybersecurity risk management practices. Regarding BSA compliance, NCUA said it remains “vigilant in ensuring the credit union system is not used to launder money or finance criminal or terrorist activity.” The agency said that field staff will focus on credit unions’ relationships with money services businesses (MSBs) and other accounts that may pose a higher risk for money laundering (a recent concern for the agency). Other priorities outlined in the letter (and noted in the summary) include internal controls, interest rate and liquidity risk, commercial lending and consumer compliance.
CFPB FILES SUITS TARGETING STUDENT LOANS, OVERDRAFT FEES
Although Richard Cordray could be out of a job as early as next week – if newly inaugurated-President Trump decides to exercise his “at will” authority to fire him – the CFPB director’s agency is continuing to act in the courts, filing lawsuits this week against both student-loan giant Navient, and TCF National Bank, a Minnesota-based bank with operations in seven states. The lawsuit against Navient (a Delaware-based company) claims that the organization “systematically and illegally” failed borrowers at every stage of student loan repayment, creating obstacles by providing bad information, processing payments incorrectly, and failing to act when borrowers complained.
The action against TCF National asserts that the bank tricked consumers into costly overdraft services, alleging that TCF designed its application process to obscure the fees and “make overdraft seem mandatory for new customers to open an account,” among other things. The Navient lawsuit seeks to recover “significant relief for the borrowers harmed by these illegal servicing failures,” while the TCF National suit seeks “redress for consumers, injunctive relief, and penalties.” Meanwhile, even if Trump takes no action against Cordray (who is seeking a court review of a ruling last year that he may be replaced “at will” of the president, rather than “for cause’), the days of a single director overseeing the powerful agency may be numbered: members of Congress have vowed to replace the director with a five-member board. Meanwhile, in a Senate confirmation hearing Thursday, Treasury Secretary-designate Steven Mnuchin said that he supported the bureau, but favors its budget being subject to the congressional appropriations process (a change some in Congress are also seeking).
NOMINATIONS OPEN FOR CU COUNCIL (AND OTHERS)
Nominations for appointment to the CFPB’s Credit Union Council (CUAC) have opened, with candidate applications due on or before March 1 to be considered for a slot on the council, the bureau expects to announce selection of new members in August to the CUAC (as well as its Consumer Advisory Board and Community Bank Advisory Council). Members of the councils and board are drawn from representatives of consumers, communities, the financial services industry and academics, according to the bureau. There are currently 18 members of the CUAC; six represent state credit unions: Robert “Bob” Donley, Members Credit Union (Winston-Salem, N.C.); Patrick F. Harrigan Service Credit Union (Portsmouth, N.H.); Amy Nelson, Point West Credit Union (Portland, Oregon); Carrie O’Connor, CommunityAmerica Credit Union (Lenexa, Kansas); James “Jim” Spradlin, Park Community Credit Union (Louisville, Ky.); Raynor Zillgitt Lake Trust Credit Union (Brighton, Mich.)
Appointments to the councils are typically for two years; appointments to the board are typically for three years, CFPB stated. The agency also noted that “Only complete applications will be given consideration for review of membership on the Board and Councils,” and that “the bureau will not entertain applications of federally registered lobbyists for a position.” Applications may be submitted electronically (strongly encouraged by CFPB), or by mail or courier. See the link below to the notice in the Federal Register for complete submission addressing details.
REGISTRATION FOR SUMMIT ’17 – IN SAN DIEGO – OFFICIALLY COMMENCES
The 2017 NASCUS State System Summit is open for registration, with a focus on high-quality speakers and significant agenda topics for the four-day meeting. Set for Aug. 29-Sept. 1 in San Diego (at the Westin Gaslamp Quarter Hotel), the 2017 edition of the Summit features more than 20 hours of discussion, dialog, presentations and networking for credit union regulators and practitioners. Among the topics to be presented and discussed: FinTech, its impact on traditional financial institutions and regulation; CFPB, its leadership and future under a new administration, Congress; Interstate branching, the imperative for the state system to maintain parity with the federal system; The Military Lending Act, and its impact on credit unions (particularly in a military-prominent area such as San Diego), and; CECL, a look at the latest developments related to implementation of this new accounting standard from FASB (among others). For more information, including about accommodations, see the link below.
BRIEFLY: Welcome to NASCUS; HMDA webinar; Florida Directors College; On the road; L&R Committee call (join us)
Another new member is being welcomed this week to NASCUS: InTouch Credit Union of Plano, Texas. (assets: $783 million) … New reporting requirements under the Home Mortgage Disclosure Act (HMDA) and recent rule changes for prepaid accounts are the topics for an NCUA webinar Wednesday, Feb. 28, beginning at 2 p.m. ET … Mark your calendars for the March 8 Directors College & Executive Forum in Orlando, Fla. The one-day event (at Fairwinds Credit Union) is co-sponsored by NASCUS, the Florida Office of Financial Regulation and the League of Southeastern Credit Unions and will include discussion of various regulatory issues; BSA requirements, the Military Lending Act (MLA) and current exam issues … NASCUS’ Lucy Ito and Brian Knight briefed regulators from western states (including Arizona, California, Idaho, Montana, Oregon, Utah and Washington) this week during a NASCUS-sponsored gathering held at the San Francisco Federal Reserve … The NASCUS Legislative and Regulatory Committee has scheduled a conference call for Thursday, Jan. 26 at 3 p.m. ET, to discuss pending and future issues. For more information, contact NASCUS EVP and General Counsel Brian Knight at firstname.lastname@example.org.
Patrick Keefe, NASCUS Communications, email@example.com or (703) 528-5974
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