July 10, 2020 NASCUS Report

THIS WEEK: States support sub debt rule, but look ahead; Ito notes long effort by NASCUS; Support voiced for joint account proposal; State system weighs in on PPP changes; Agency takes action on rural FOMs; Legal opinions look at pair of issues; ND seeks extension of appraisal waiver; FinCEN warns of fraud red flags; CFPB finalizes new payday loan rule; ON THE (VIRTUAL) ROAD in AZ, CO, WY; Pandemic affects meetings; BRIEFLY: ASI exec retires, CLF borrowing authority balloons; CFPB taps deputy; Bureau sets up new engagement division

State system backs sub debt rule,
but urges room for future growth

The state system supports the inclusion of subordinated debt in the calculation of a credit union’s regulatory capital and modernization of the overall regulatory capital framework, but advocates for a rule that sets the stage for innovation and growth in the future, according to a comment letter submitted this week by NASCUS.

In its comment to NCUA on the agency’s proposal for a rule on subordinated debt for credit unions, NASCUS said the development of the rule is an essential complement to the implementation of a risk-based capital (RBC) rule.

Including Subordinated Debt in risk-based capital ratio calculations is consistent with the statutory purposes of both state and federal credit unions and is sound public policy,” NASCUS wrote. “This rule will help credit unions and their members, protect the share insurance fund, and help place natural person credit unions in the United States on par with credit unions and other depository institutions worldwide.”

In January, NCUA issued a proposal to allow certain credit unions (low-income designated credit unions (LICUs), complex credit unions, and “New Credit Unions” – or those that have both been in operation for less than 10 years and have $10 million in assets for less) to issue subordinated debt for purposes of regulatory capital treatment. More specifically, the proposal creates new provisions in the agency’s rules for applying for authority to issue subordinated debt, credit union eligibility to issue subordinated debt, prepayments, disclosures, securities laws, and the terms of subordinated debt notes.

The 12-page NASCUS comment letter, signed by NASCUS President and CEO Lucy Ito, acknowledged that organizing the proposal around subordinated debt instruments and borrowing minimizes issues related to federal and state credit union tax exemptions and credit union mutuality. However, NASCUS added, NCUA should avoid issuing a final rule that unintentionally closes off future market innovation through an overly prescriptive approach that could be counterproductive and unnecessary.

That approach, NASCUS said, “is counterproductive because it would unduly restrict the ability of credit unions and the marketplace to develop and evolve models of Subordinated Debt or Subordinated Capital that benefit the credit union system, present an attractive return to third-parties, and cohere to the unique features of credit unions. An overly restrictive initial rule could thwart the very innovation needed for the development of a robust Subordinated Debt marketplace.’

NASCUS also noted that existing supervisory safeguards – at the state level in particular — mitigate risks now, further minimizing the need for a prescriptive approach in the rule. NASCUS pointed to a provision in the proposal that requires pre-approval of original issuances of securities, which ensures that state and federal regulators have the opportunity to “identify imprudent offerings.”

Many state regulators have extensive experience with securities regulation and subordinated capital by virtue of their roles as banking and securities regulators and are therefore well positioned to evaluate innovative offerings,” NASCUS pointed out.

In other comments, the NASCUS letter stated:

  • Due consideration should be given to the successful history of LICU issuances of Secondary Capital as well as the unique nature of the credit union system.
  • The agency should avoid classifying credit union debt agreements as “securities” where comparable contracts executed by other depository institutions might not be so classified.
  • The association does not support special registration requirements or special supervisory fees because both would disproportionately burden smaller credit unions.
  • Proposed limitations on negative covenants may dampen the potential market for credit union issuances, although NASCUS voiced support for inclusion of interest payments and repudiation safe harbors.
  • NASCUS generally supports provisions prescribing various protections for investors and issuing credit unions including requirements for reporting and disclosures, director and officer liability, broker dealer registration requirements, and suitability standards for investors.
  • However, limitations on resale of credit union subordinated debt raises concern in that it might hinder the marketability of the issuances. “In particular, the distinction between entity and individual investor suitability combined with the pass-through restrictions on the secondary market is too prescriptive to be workable in the marketplace,” NASCUS stated.
  • Limitations on the dollar amount of offering are overly prescriptive and NASCUS recommended those be reconsidered.
  • On concentration limits, NASCUS wrote that it supports a baseline 25% limit, but recommended the agency include a waiver provision allowing qualifying credit unions to request an increase up to 40%.

NASCUS Comment Letter: Proposed Rule: Subordinated Debt

Ito: NASCUS comments based on decades of work

For more than 20 years, NASCUS has advocated for all credit unions – low-income designated, complex, and newly chartered – to have the ability to issue subordinated debt for regulatory capital treatment — and the association commends NCUA for heeding the call and taking steps to develop a subordinated debt rule, said NASCUS President and CEO Lucy Ito said in submitting its comment letter this week.

“While the development of a subordinated debt rule is an arduous task, it will bring profound benefits to the credit union industry including, helping credit unions and their members, protecting the share insurance fund, and placing natural person credit unions in the United States on par with credit unions and other depository institutions worldwide,” she added.

She noted that since 1998, the state system has heralded that permitting all credit unions to have access to subordinated debt is sound public policy. “We stand ready to collaborate with NCUA to make credit union capital reform a reality,” she said.

Support for proposed joint account rule–with modest change

There were three more comment letters filed this and late last week by NASCUS – a second with NCUA, and two with the Small Business Administration (SBA) concerning the program to help businesses keep paying their workers (see following item).

Regarding the second NCUA letter, NASCUS wrote that providing federally insured credit unions flexibility in satisfying the signature card requirement with information in joint account records acknowledges that account opening practices have evolved substantially over the last nearly 50 years.

The comment was submitted in response to NCUA’s proposal in May that would provide an alternative method to satisfy the membership card or account signature card requirement necessary for insurance coverage (the signature card requirement). NCUA said that even if an insured credit union could not produce membership cards or account signature cards signed by the joint accountholders, the signature card requirement could be satisfied by information contained in the account records of the insured credit union establishing co-ownership of the share account. “For example, the signature card requirement could be satisfied by the credit union having issued a mechanism for accessing the account, such as a debit card, to each co-owner or evidence of usage of the joint share account by each co-owner,” the agency proposed

NASCUS agreed with the proposal’s overall approach – and offered a modest change: replacing the phrase “such as” with “including, but not limited to.” Doing so, NASCUS wrote, would allow NCUA to “make clear on the face of the regulation that other evidence in the account records may be sufficient to establish qualifying joint ownership of a share account.”

NASCUS comments: Proposed Rule Joint Ownership Share Accounts

In pair of comments, state system urges smoother PPP program

The rocky roll-out of the lending program meant to help businesses keep paying their employees during the coronavirus crisis calls for the agency administering it to streamline and simplify its procedures, in order to encourage credit unions and other lenders to continue participating, NASCUS said in a pair of comment letters submitted late last week.

In the letters to the Small Business Administration (SBA) on its Paycheck Protection Program (PPP) NASCUS addressed two calls for comment on the program by the agency. The first comment was on review procedures for loans made under the PPP; the second, on procedures for forgiveness of loans for those businesses that keep their employees on the payroll.

“We hope as SBA progresses to finalization of the rules that will govern the administration of the PPP it will keep in mind the turbulent nature of the roll-out of the program with near constant regulatory and statutory changes being promulgated throughout the first three months of implementation,” NASCUS wrote in its comments about loan reviews. “Financial institutions already face a growing specter of litigation related to uncertainty in PPP rules. It is incumbent on the SBA to provide clear, unambiguous rules as well as good faith safe-harbor protections for lenders that stepped up to administer the loan process under the PPP.”

NASCUS recommended that the agency streamline and simplify the lender review process and establish a good faith safe harbor for lenders. “A broad category of PPP loans should be automatically forgiven or carry the presumption of forgiveness barring SBA review and identification of problems,” NASCUS stated. “This would ease the burden on lenders as well as borrowers and serve the spirit of the program to assist small businesses rather than encumber them with a complicated forgiveness process and a strained relationship with their lender.”

As an example, NASCUS noted the current procedures place the onus on the lender to evaluate the eligibility of the borrower for forgiveness and to communicate to the borrower the determination that forgiveness is being denied imparts upon the lender the perception that the lender’s criteria resulted in the denial when in fact these are all SBA’s thresholds. “Particularly for credit unions where the borrowers have a member relationship with the credit union, this poses a potentially serious reputation risk,” the association wrote.

In its second letter, focused on the loan forgiveness aspect of PPP, NASCUS again recommended that the SBA create safe harbors for lenders acting in good faith while administering all aspects of the PPP. “We note that the program has continued to evolve even as more loans are processed,” NASCUS wrote. “Policies and procedures, including custom forms, have been rendered moot after implementation by subsequent statutory or regulatory changes to the PPP beyond lenders’ control. Lenders should not be penalized, or exposed to liability, by technical missteps or superseding guidance.”

NASCUS also encouraged the SBA to establish a presumption of eligibility and forgiveness for categories of loans to ease the administrative burden on both borrowers and lenders.

NASCUS comment: Business Loan Program Temporary Changes; Paycheck Protection Program – Requirements – Loan Forgiveness

NASCUS comment: Business Loan Program Temporary Changes; Paycheck Protection Program – SBA Loan Review Procedures and Related Borrower and Lender Responsibilities

Agency taking action ‘immediately’ in rural FOMs

Meanwhile, NCUA wrote a letter of its own this week, saying any federal credit union that had a rural district membership eligibility application postponed – for, in some cases, nearly two years — as a result of the now-resolved lawsuit by bankers will see its application processed immediately.

In a letter to credit unions (LTCU 20-CU-21) the agency said in addition to the postponed rural district membership applications, it will begin accepting new rural applications, also immediately. Federal credit unions with a rural district community charter are eligible to apply, the agency said.

The message comes in the wake of the Supreme Court’s June 29 rejection of an appeal by the American Bankers Association (ABA) of a lower court’s decision on the credit union regulator’s membership rules. The suit was originally brought in 2017, and in March of the next year a federal district court ruled in part for the banking group. Both NCUA and the bankers appealed the decision (to the D.C. Circuit Court of Appeals), which overturned the lower court’s partial decision and held up the agency’s original rule, for the most part.

The bankers appealed to the Supreme Court, which last week declined to consider the appeal – essentially ending the bankers’ challenge of the rule.

That development, NCUA said in a release this week, “ends nearly four years of uncertainty and helps the NCUA foster greater financial inclusion for all Americans.”

The agency asserted that a lack of financial access is especially prevalent in rural communities, which it said have experienced the withdrawal of financial institutions over the last decade. “The Supreme Court’s decision will assist the agency’s efforts to bring these important and often overlooked communities back into the financial mainstream,” the agency said.

In addition to processing the postponed membership eligibility applications, NCUA said it was also in the process of reinstating rural districts for 18 credit unions that had these removed due to the ABA lawsuit. “The NCUA’s Office of Credit Union Resources and Expansion will contact these credit unions by July 10, 2020, to confirm the reinstatement,” the agency said. “No further action will be required for these credit unions.”

According to NCUA, a proposed geographic area under its membership rules would generally qualify as a rural district if it has well-defined, contiguous geographic boundaries, and the total population of the proposed district does not exceed 1 million.

NASCUS has also published a brief summary of the NCUA LTCU; see the link below.

NCUA LTCU 20-CU-21: Field of Membership – Rural Districts

NASCUS Summary: Letter to Credit Unions 20-CU-21 Field of Membership Rural Districts

Legal opinions look at member proximity, ALUS approvals

Even more letters from NCUA were released publicly this week, including two legal opinion letters.

In the first, the agency noted that the “reasonable proximity” requirement under the Federal Credit Union Act doesn’t set a maximum distance between the location of a group that wants to be served and the location of the credit union that would serve it.

The June 10 opinion, signed by agency Acting General Counsel Frank Kressman, states that consistent with the statute and legislative history, the NCUA has always viewed “reasonable proximity” as including a geographic component, “but the NCUA will continue to assess this geographic component on a case-by-case basis free of a mileage limit.”

The opinion notes that the agency board, in its first iteration of the NCUA chartering manual following enactment of the 1998 Credit Union Membership Access Act (CUMAA), determined that “numerous inequities” would arise from using distance factors. “While mileage limitations often facilitate regulatory decisions, frequently, they are artificial and cause unfair results simply because of small geographic differences,” Kressman wrote. “Accordingly, mileage limitations were deemed inappropriate and not advisable. Essentially, the service area means that a member can reasonably access the service facility. In rural areas, this may include distances encompassing several counties. In a densely populated area, it may be a portion of a city,” his letter stated.

The second legal opinion letter, dated June 16, considers whether an FCU member service representative is barred by the FCU Act from inputting data into the institution’s automated loan underwriting system (ALUS) and then disbursing funds if the ALUS, not the member rep, approves the loan. With the right controls and safeguards in place, the FCU Act “does not prohibit such a scenario,” the letter notes.

The opinion focuses on an FCU Act provision that states that no individual can both approve a loan application and disburse the loan funds. “NCUA’s long held interpretation is that the purpose of this provision is to segregate loan approval and disbursement duties of the loan officer to decrease the incidence of fraud, embezzlement, and errors,” the letter states. “We continue to interpret § 1761c(b) of the FCU Act in this way.”

Legal opinion: Reasonable Proximity Analysis

Legal opinion: Automated Loan Underwriting System – Segregation of Duties for Loan Officers

ND regulator, CUs seek extension of appraisal waiver

A extension of a temporary appraisal waiver, first granted a year ago, is being sought by financial institutions in North Dakota – partly because of the financial impact of the coronavirus crisis, regulators, credit unions, banks and their trade groups wrote this week.

The groups – including North Dakota Gov. Doug Burgum (R), the North Dakota Department of Financial Institutions, the Credit Union Association of the Dakotas and two bank trade groups – applied to the FFIEC’s Appraisal Subcommittee for an extension of the temporary waiver, first granted in July 2019. NASCUS last year strongly supported the granting of the waiver, and supports additional time for the waiver.

In applying for the extension, the groups said financial institutions are reporting that the waiver is utilized and that the option has been helpful.

“There has not been much change in appraiser availability in the last year, and it appears wait times are still long throughout every section of North Dakota,” the groups said. They noted that regulators have issued numerous statements to address the COVID-19 pandemic, including encouraging financial institutions to work with borrowers, to provide borrowers with quick access to funds, and to provide borrowers with the ability to take advantage of equity in their real estate.

As a result, it makes sense to keep the waiver in place since it provides much needed flexibility for financial institutions and borrowers, which will also help the economic recovery,” the North Dakota groups stated. “Due to the pandemic, collaboration work with the appraiser and financial institutions industries to determine possible solutions has been paused. Therefore, we are requesting a two-year extension.”

The waiver covers credentialing requirements for appraisals for federally related transactions under $500,000 for 1-to-4 family residential real estate transactions and under $1 million for agricultural and commercial real estate transactions throughout the state. The original request last year was spurred by the state due to local concerns over long wait times for appraisals, caused by a lack of appraisers in the state.

Although waivers may be issued for five years, last year the appraisal subcommittee granted only a one-year waiver with an option for a second year. The subcommittee said it agreed to the waiver provided that both the state department of financial institutions and the North Dakota Appraiser Board work to address issues that lead to ending the long turnaround times for an appraisal.

Despite the request for a two-year extension, it may be that only a one-year extension is possible given the appraisal subcommittee’s previous waiver of one year with an option for a second year.

North Dakota Requests Extension for Appraisal Waiver

FinCEN warns against fraud ‘red flags’

Credit unions and other financial institutions should be on the look-out for imposter scams and “money mule schemes,” both being used by fraudsters during the coronavirus crisis, the Treasury’s financial crimes arm said this week.

According to an advisory issued by the Financial Crimes Enforcement Network (FinCEN), the fraud schemes deceive victims by impersonating federal government agencies, international organizations, or charities. FinCEN said it identified the financial red flag indicators described in the advisory to alert financial institutions to the frauds and to assist financial institutions in detecting, preventing, and reporting suspicious transactions associated with the COVID-19 pandemic.

In the imposter scams, FinCEN said, criminals impersonate organizations such as government agencies, non-profit groups, universities, or charities to offer fraudulent services or otherwise defraud victims.

The “money mule” scheme – involving a person who transfers illegally acquired money on behalf of or at the direction of another — is a bit more complicated. According to FinCEN, the schemes span the spectrum of using unwitting, witting, or complicit money mules. An unwitting or unknowing money mule is an individual who is “unaware that he or she is part of a larger criminal scheme.” The individual is motivated by his/her trust in the actual romance, job position or proposition. A witting money mule is an individual who “chooses to ignore obvious red flags or acts willfully blind to his or her money movement activity.” The individual is motivated by financial gain or an unwillingness to acknowledge his or her role, the agency said.

The complicit money mule is an individual who is “aware of his or her role as a money mule and is complicit in the larger criminal scheme.” The individual is motivated by financial gain or loyalty to a criminal group, FinCEN said.

FinCEN said that, during the COVID-19 pandemic, U.S. authorities have detected recruiters using money mule schemes, such as good-Samaritan, romance, and work- from-home schemes. Law enforcement has also identified criminals using money mules to exploit unemployment insurance programs during the COVID-19 pandemic, FinCEN said.

FinCEN Issues Advisory on Imposter Scams and Money Mule Schemes Related to COVID-19

CFPB drops ‘ability to repay,’ ratifies most rules

A new final rule issued this week on payday lending revokes “ability to repay” provisions of the previous rule but keeps provisions blocking unapproved payments, the CFPB said. At the same time, the bureau said it is ratifying most of its rules issued between 2012-20 in the wake of a Supreme Court ruling last week.

  • ‘Ability to repay’ lacked ‘legal, evidentiary bases’

The new final rule on payday lending (the “Payday, Vehicle Title, and Certain High-Cost Installment Loans”) will take effect 90 days after publication in the Federal Register. The agency said rescinding the requirement in its regulation that lenders verify that borrowers have the ability to repay a loan before it is issued, first adopted in 2017, “ensures that consumers have access to credit and competition in states that have decided to allow their residents to use such products, subject to state-law limitations.”

The bureau stated that the ability to repay and underwriting provisions were dropped because the 2017 rule lacked sufficient legal and evidentiary bases. Under those provisions, it was considered an “unfair and abusive practice” for a lender to make a short-term or longer-term balloon- payment loan, including payday and vehicle title loans, “without reasonably determining that consumers have the ability to repay those loans according to their terms.” The provisions also prescribed mandatory underwriting requirements for making the ability-to-repay determination.

The agency asserted that, as of now, 32 states allow small dollar lending, many of which set maximum interest rates for small dollar loans or impose other restrictions or limitations on their use. “Today’s action will help to ensure the continued availability of small dollar lending products for consumers who demand them, including those who may have a particular need for such products as a result of the current pandemic,” CFPB stated.

Meanwhile, also in Tuesday’s final rule, the bureau stated it is proceeding to apply payments provisions of the 2017 final rule which prohibit lenders from making a new attempt to withdraw funds from an account where two consecutive attempts have failed unless consumers consent to further withdrawals.

CFPB also announced that it has denied a petition to commence a rulemaking to exclude debit and prepaid cards from the payments provisions of the small dollar lending rule.

  • Rules ‘ratified’ in wake of court ruling

On the same day the bureau released its new payday lending regulation, it also announced it was ratifying the regulatory actions it has taken over last nearly eight years – a response to a Supreme Court decision last week declaring the agency’s structure unconstitutional, but leaving the agency in place to operate.

The ratification notice, the agency said, “provides the financial marketplace with certainty that the rules are valid” in light of last week’s Supreme Court decision, which found that the president may remove the CFPB director at will, rather than “for cause” as outlined in the law establishing the bureau. In that sense, the court ruled the agency’s structure created an unconstitutional reduction of presidential power.

For the most part, regulatory actions taken by the bureau since it opened its operations in 2012 were left intact. Two, however, were not: the July 2017 rule titled “Arbitration Agreements,” and the 2017 payday lending rule.

The arbitration rule was rendered inert in 2017 after a joint resolution under the Congressional Review Act was enacted that “disapproves the rule” and provides that the “rule shall have no force or effect.” As for the payday lending rule, the agency said that (as noted above) that it has revoked the mandatory underwriting provisions of that rule and has separately ratified the payment provisions of the rule.

The agency also noted that it is considering whether ratifications of “certain other legally significant actions by the Bureau” — such as certain pending enforcement actions — are appropriate. It did not provide any other details.

Consumer Financial Protection Bureau Issues Final Rule on Small Dollar Lending

Consumer Financial Protection Bureau Ratifies Prior Regulatory Actions

ON THE (VIRTUAL) ROAD: Ito on AZ, CO, WY video call

Net worth, prompt corrective action (PCA) issues, court action over field of membership, interstate branching and subordinated debt were among the subjects NASCUS President and CEO Lucy Ito discussed with members of the Mountain West Credit Union Association (MWCUA) during a video conference this week. The MWCUA represents credit unions in Arizona, Colorado and Wyoming. NASCUS Credit Union Advisory Council Vice Chairman Mike Williams, president and CEO of Colorado CU in Denver (a former chairman of the MWCUA) introduced Ito. The video conference, hosted by MWCUA President and CEO Scott Earl, was one of a series that the association hosts for its member credit unions throughout the year and features discussion about current issues.

As pandemic surges, Summit canceled, BSA/AML postponed

As the coronavirus surges this summer, NASCUS has been obliged – out of an abundance of caution for the health and safety of its members and the state credit union system – to cancel its 2020 Summit as an “in-person” meeting, and to postpone the 2020 NASCUS/CUNA BSA/AML Certification Conference.

The Summit – the association’s annual gathering of state regulators and credit unions to listen to ideas, share thoughts and look for solutions to the challenges and opportunities facing the state credit union system – had been scheduled for Aug. 9-12 in New York, N.Y. The association is considering New York as its possible venue for a 2021 Summit.

In the meantime, NASCUS is developing a virtual Summit and annual meeting, possibly occurring in late August. Watch for more on that in the coming days.

Also this week, NASCUS and the Credit Union Natl. Assn. (CUNA) announced that the 2020 NASCUS/CUNA BSA/AML Certification Conference, originally scheduled for Nov. 9-12 in Fort Lauderdale, Fla., has been postponed. The two associations said the action was taken after the coronavirus surged in Florida and around the nation over the past month. A future date for the meeting will be announced. Registration fees already paid are available to apply to the next scheduled certification conference, or other future events including the BSA/AML Certification eSchool, sponsored jointly by NASCUS and CUNA.

BRIEFLY: Longtime ASI executive Robson retires; CLF borrowing authority balloons to $25.8 billion; Bureau taps new deputy director … and sets up new engagement/outreach division

Curt Robson, American Share Insurance (ASI) Corp. Vice president of finance and secretary/treasurer, has retired, the private share insurance firm said this week. According to ASI, Robson worked at the firm for more than 29 years. Taking his place is Peter Love, who joined ASI in 2018 … The borrowing authority for NCUA’s Central Liquidity Facility (CLF) — particularly due to the financial impact of the coronavirus crisis — rose to $25.8 billion by the end of May – an increase of $15.3 billion (or 143%) since April, the agency said this week. The reason behind the expansion: membership by all 11 corporate credit unions. The memberships mean that all of their 3,797 member-credit unions have access to CLF, the agency said. Essentially, that means 73% of all federally insured credit unions now have access to the CLF to help meet liquidity needs either as direct (regular) members or as members through their corporate credit unions, according to the agency … Thomas Pahl is the new deputy director of the CFPB, the third person to fill that position so far this year. Pahl has previously served as policy associate director for research, markets, and regulations for the bureau since April 2018. He replaces Leonard Chanin in the position of deputy director, who split time in that job with his other role at the FDIC as deputy to Board Chairman Jelena McWilliams, a position he assumed in 2019. Chanin, in turn, took the place of Brian Johnson, who left the CFPB in early March to join a Washington law firm … Also this week, the bureau announced the creation of a new Consumer Education and External Affairs (CEEA) division, which consolidates a number of existing responsibilities at the agency. The CFPB said the new division will “focus on a more coordinated and Bureau-wide approach to engagement and communication with consumers, policymakers, academics, and other stakeholders.” The division will be led, the bureau said, by Policy Associate Director Andrew Duke, a former Capitol Hill staffer, who was named to that position in 2019.

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