July 17, 2020 NASCUS Report

THIS WEEK: Pandemic surges, NCUA updates supervisory priorities; Senate panel to consider NCUA, Fed nominees; Summary outlines virtual exam RFI …; … while another looks at CFPB advisory opinion program; CU credit builder loans reviewed; Report offers hint of virus financial impact; Top CU CEOs, regulators to ‘exchange;’ BRIEFLY: States represented on COVID-19 panel

In face of continuing coronavirus crisis,
NCUA updates supervisory priorities

A delay in rolling out “modernized” exam and data access to next year is one of the outcomes of NCUA’s revamped list of regulatory priorities announced this week.

In a letter to credit unions (LTCU 20-CU-22), NCUA said it is delaying to the second half of 2021 the data and exam modernization efforts it envisions through the NCUA Connect and MERIT programs. (NCUA Connect is a secure, common entry point for authorized users to access NCUA applications; MERIT – the Modern Examination and Risk Identification Tool – is a new examination tool.)

However, the agency will continue to use MERIT in 2020 and 2021 in both a pilot and limited-release capacity,” the agency stated. NASCUS and the state system have been working closely with the agency to ensure both programs meet the needs of state supervisory agencies.

Meanwhile, in the same letter, NCUA said anti-money laundering efforts, use of aid to deal with the coronavirus crisis, serving hemp-related businesses, credit risk management, LIBOR transition and liquidity risk are all among the updated items in its list of regulatory priorities for the remainder of the year. The agency said the additional items to its regulatory priority list are those that “pose elevated risk to the credit union industry and the National Credit Union Share Insurance Fund given the current environment.”

The agency outlined its approach to exams in three areas: smaller credit unions, those considered larger and those feeling the stress of the economic downturn.

The NCUA’s targeted Small Credit Union Exam Program (SCUEP) procedures will be used to examine most federal credit unions with assets under $50 million,” the agency stated. “For all other credit unions, examiners will conduct risk-focused examinations, concentrating on areas of highest risk, new products and services, and compliance with applicable laws and regulations.”

Those credit unions experiencing “elevated sensitivity and exposure to economic stressors” will receive “a commensurate increase in the NCUA’s supervisory activity,” the agency said.

More specifically, the key areas the agency outlined in its updated priority list included:

Bank Secrecy Act Compliance/Anti-Money Laundering (BSA/AML): The agency said that “during every examination, the NCUA will continue to conduct BSA/AML reviews and will take appropriate action when necessary to ensure credit unions meet their regulatory obligations. Customer due diligence and beneficial ownership requirements that became effective May 11, 2018, will continue to be ongoing areas of emphasis.”

Coronavirus Aid, Relief and Economic Security Act: “NCUA has added the Coronavirus Aid, Relief and Economic Security Act (CARES Act) as a supervisory priority to reflect the importance of the provisions outlined in the Act. NCUA examiners will review credit unions’ good faith efforts to comply with the CARES Act and will take appropriate action, when necessary, to ensure credit unions meet their obligations under the new law.”

Serving Hemp-Related Businesses: “NCUA examiners will continue to collect data through the examination process concerning the types of services credit unions provide to hemp-related businesses.”

Credit Risk Management and Allowance for Loan and Lease Losses: “In response to the economic impact of the COVID-19 pandemic and subsequent regulatory and statutory changes, the NCUA is shifting its emphasis to reviewing actions taken by credit unions to assist borrowers facing financial hardship. The NCUA will also review the adequacy of loan and lease losses (ALLL) accounts to address the pro-cyclical effects of economic downturns.”

LIBOR Transition Planning: “Credit unions offer, own, and are counterparties to London Interbank Offered Rate (LIBOR)-based products and contracts, including loans, investments, derivatives, deposits, and borrowings. These may be subject to increased legal, financial, and operational risks once the reference rate is no longer available (after the end of 2021). On July 1, 2020, the FFIEC issued a Joint Statement on Managing the LIBOR Transition that highlights the risks that will result from the transition away from LIBOR and encourages supervised institutions to continue their efforts to transition to alternative reference rates.”

Liquidity Risk: “The economic impact of the COVID-19 pandemic may result in additional stress on credit union balance sheets, potentially requiring robust liquidity management over the course of 2020 and into 2021. As a result, examiners will continue to review liquidity risk management and planning in all credit unions, and will place emphasis on: The effects of loan payment forbearance, loan delinquencies, projected credit losses and loan modifications on liquidity and cash flow forecasting; Scenario analysis for changes in cash flow projections for an appropriate range of relevant factors (for example, changing prepayment speeds); Scenario analysis for liquidity risk modeling, including changes in share compositions and volumes; Potential effects of low interest rates and the decline of credit quality on the market value of assets, funding costs and borrowing capacity; and adequacy of contingency funding plans to address any potential liquidity shortfalls.

Other areas highlighted in the letter are cybersecurity and consumer financial protection.

NCUA LTCU 20-CU-22: Update to NCUA’s 2020 Supervisory Priorities

NCUA, Fed board nominees to be considered by panel

A hearing on the nomination of a member of the NCUA Board, and a vote on recommending for confirmation two nominees to the Federal Reserve Board, have been scheduled for next week by the Senate Banking Committee.

The day for the committee gets underway Tuesday (at 10 a.m. ET) with a hearing on the nomination of Kyle Hauptman to and NCUA board member. (The hearing will be streamed live, via the Internet.) If confirmed, he would take the seat of current NCUA Board Member (and former chairman) J. Mark McWatters. His term on the board ended last August; he has been serving in a “holdover” status since then — a common practice for NCUA and other federal financial regulators that have undergone board transitions.

The White House announced the president’s intention to nominate Hauptman to the position last month.

A Senate committee staff aide and former member of President Donald Trump’s 2016 presidential transition team, Hauptman, if confirmed by the Senate, would serve the remainder of a six-year term which ends in August 2025 (this is an update from earlier, which incorrectly reported the term ending in 2024).

In announcing Hauptman’s nomination, the White House said he was a policy advisor for financial services for 2012 Republican presidential nominee Mitt Romney during that campaign (Romney is now a U.S. senator from Utah). He holds a B.A. from the University of California, Los Angeles (UCLA) and an MBA from Columbia University, the White House said.

Later in the day (at 2 p.m. ET), the committee will meet to vote on the confirmation recommendations for Judy Shelton and Christopher Waller to open seats on the Federal Reserve Board. If confirmed, Shelton would serve an unexpired term of 14 years from Feb. 1, 2010 (or until 2024). She would fill the seat vacated by former Chairman Janet L. Yellen, who resigned. Waller, if likewise confirmed, would serve the remainder of a 14-year term that began Feb. 1, 2016 (or until 2030). He would fill the seat vacated by former Board Member Sarah Bloom Raskin, who also resigned.

Shelton is a former executive director of the European Bank for Reconstruction and Development. She has also described herself as a “self-employed economist.” Waller is an economist and executive vice president and director of research at the Federal Reserve Bank of St. Louis.

Senate Banking Committee nomination hearing, July 21

Summary outlines RFI on virtual exam program

A summary of NCUA’s “request for information” (RFI) on a virtual examination program for the agency has been developed and published by NASCUS. It is available to NASCUS members only on the association’s website.

The RFI was issued by the agency board as a result of its June 25 meeting in Alexandria, Va. The agency is seeking comments on the virtual exam program, it said, in an effort to modernize its program.

“The NCUA is seeking the public’s views on its modernization initiative and is eager to receive input from interested stakeholders on a number of aspects related to the future of a virtual examination program,” the agency said.

In particular, the agency said it is looking for comments about unnecessary hurdles or burdens credit unions expect with leveraging various technological advances such as artificial intelligence, machine learning, process robotics, FinTech, RegTech.

The agency is also looking for guidance on “ways we could update our policies to help facilitate a greater use of technology.”

Comments are due to NCUA Aug. 31.

NASCUS President and CEO Lucy Ito said last month when the board issued the RFI that the state system looks forward to providing comments, noting that collaboration between state supervisory agencies and NCUA is essential since both the agency and states examine federal insured, state-chartered credit unions (FISCUs).

NASCUS Summary: NCUA Request for Information (RFI), Strategies for Future Examination & Supervision Utilizing Digital Technology

Summary of CFPB’s ‘pilot advisory program’ published

A new pilot program from CFPB designed to provide clarity “where uncertainty exists” over the agency’s rules is the focus of a summary from NASCUS published this week; the summary is available to members only.

In June, the bureau announced the new “pilot advisory opinion” program (which it refers to as “AO”), saying the program will be based on submissions made by regulated entities and the public, seeking clarity on bureau rules. Under the program, the submissions will be reviewed for clarity, topics the bureau will address in responses will be selected based on the program’s priorities, and then the bureau will make those responses available to the public. The program is proposed as a procedural rule with a request for comments, which are due by Aug. 21.

The agency said in announcing the program that its priorities are:

  • Providing consumers with timely and understandable information to make responsible decisions;
  • Identifying outdated, unnecessary or unduly burdensome regulations in order to reduce regulatory burdens;
  • Establishing consistency in enforcement of federal consumer financial law in order to promote fair competition;
  • Ensuring markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation.

Other factors “weighing for the appropriateness of an AO” on an issue, the bureau said, include: whether an issue has been noted in prior bureau examinations as one that could benefit from additional regulatory clarity; the issue’s “substantive importance” or impact; and whether the issue concerns “an ambiguity that the Bureau has not previously addressed through an interpretive rule or other authoritative source.”

NASCUS Summary: Procedural Rule re: Advisory Opinions Pilot (members only)

Report: ‘credit builder loans’ may raise credit scores

Credit unions figured prominently in a new report issued this week on credit builder loans – which the CFPB said can increase the likelihood of credit record establishment for consumers without such documentation, and improve credit scores for those without current outstanding debt.

The bureau said its report focuses on 1,531 credit union members who were offered a credit builder loan (CBL). The report indicates, the bureau said, that opening a CBL increased a consumer’s likelihood of having a credit score by 24%; participants without existing debt saw their credit scores rise by 60 points more than participants with existing debt; and the loan was associated with an average increase in participants’ savings balances of $253.

The report builds on earlier work by the bureau on “credit invisibles.” CFPB defines those as “consumers whose documented credit history is so limited they don’t have credit scores or whose credit scores are not based on a complete history of their debt repayment.” According to earlier bureau research, approximately 26 million U.S. adults, one in 10, lack a credit record and are “credit invisible.” About two years ago, the agency released a study that found consumers in rural areas and “micropolitan statistical areas” – non-rural census tract areas outside of metropolitan statistical areas (MSAs) – have the highest incidence of being “credit invisible.” Approximately 15% of consumers more than age 25 in rural areas can be classified as “credit invisible,” and approximately 12% in micropolitan areas, the study found.

Without a credit score consumers may face challenges to accessing credit or qualifying for lower-interest rate loans and credit products,” the bureau said in a release Monday.

The report was issued, the agency said, in conjunction with Consumer Financial Protection Week, being celebrated all this week.

CFPB Study Shows Financial Product Could Help Consumers Build Credit

Report offers glimpse of pandemic’s 2020 financial impact

A record amount of $11.4 billion in debt settlements 10 years ago during the Great Recession may provide a road map of what’s to come in 2020 as the financial impact of the coronavirus crisis becomes more apparent, a report issued late last week by the CFPB indicates.

In its Recent trends in debt settlement and credit counseling, the bureau reports that more than half of debt settlements (an agreement that the consumer will resolve the debt by paying less than the full balance owed and that can occur before or after the creditor charges-off the debt) during the height of the recession 10 years ago occurred within a year of the account first becoming delinquent. “Debt settlement and credit counseling became less common after that recession, but recently settlements have been on the rise following changes in delinquencies and credit tightness,” the bureau said.

Ominously, the bureau acknowledged that “these trends may repeat in future economic downturns.”

The report admitted that recessions differ in their underlying causes and in their effects on different households. Nevertheless, it noted, what occurred during the Great Recession may recur as consumers and lenders face increased pressures, such as increases in debt settlements and less time in severe delinquency or charge-off before settlement occurs.

CFPB Releases Report on Debt Settlements and Credit Counseling

CEOs from top CUs, regulators, to ‘exchange’

Leaders from some of the largest credit unions in the nation – both state and federally chartered – will sit down with state regulators, and the NCUA Board Chairman, during the annual NASCUS Exchange set for next week.

A new wrinkle this year: the invitation-only event is virtual, in a bow to the impact of the surging coronavirus crisis.

The event brings together the credit union CEOs and state regulators to share information and ideas about key issues facing the system. NCUA Chairman Rodney Hood joins the event this year (which takes place over two afternoons, July 20 and 21) to discuss a variety of topics, including his centerpiece issue of financial inclusion.

Other issues up for discussion: Diversity, equity and financial inclusion; emerging trends in auto lending and the broader auto sector ahead (with remarks and dialogue led by Tony Boutelle, President & CEO, CU Direct); accounting standards, interpretation, and practices in the COVID-19 world (with remarks by and discussion with Sheila Balzer, AICPA Board of Directors and Partner, SingerLewak; and Jeremy Dillard, FASB Private Company Council and Partner, SingerLewak); and discussion of mergers and acquisitions (including credit union acquisition of banks, voluntary mergers and emergency mergers). An “open discussion” session is also featured during the second day of the program.

BRIEFLY: Ito/NASCUS invited to join coronavirus task force

NASCUS’ Lucy Ito has accepted an invitation on behalf of the state system and NASCUS to join the Credit Union Natl. Assn. (CUNA)-coordinated Credit Union System COVID-19 Restart and Recovery Task Force. The group, which includes national and state trade group representatives, credit union CEOs and other credit union system partners, was formed in June by the groups. NASCUS established a COVID-19 Working Group this past spring as a sub-committee of its Legislative and Regulatory Affairs Committee. The working group is chaired by Jim Phelps of the Cornerstone Credit Union League and is comprised of state regulators, credit unions, state leagues, and other system stakeholders. NASCUS applauds CUNA’s outreach and commitment to system collaboration.

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