July 19, 2019 NASCUS Report

In 2-1 vote, NCUA approves
$1M CRE appraisal threshold

Three regulatory actions – including approval on a split vote of a final rule for appraisals on commercial real estate – were adopted by the NCUA Board at its meeting Thursday in Alexandria, Va.

Meeting at agency headquarters, the three board members also approved  – in addition to the appraisals final rule – a final regulation on fidelity bonds and a proposed interpretive rule and policy statement (IRPS) on credit union prohibitions (more details on both of those actions, below).

Voting 2-1 to approve the final appraisals rule (with Board Member Todd Harper dissenting), board installed a $1 million threshold for appraisals on non-residential (or commercial) real estate loans; prior to the final rule, the threshold was $250,000 (there was no separate threshold for commercial real estate (CRE) loans).

In adopting the rule, NCUA said it was attempting to accomplish four goals: increase the threshold below which appraisals are not required for CRE transactions to $1 million; restructure the rule to enhance clarity; exempt from current rules certain federally related transactions involving real estate in a rural area; and making conforming amendments to the definitions section.

The final rule generally will take effect 90 days after publication in the Federal Register– but at least one provision of the rule is effective immediately.

For real estate transactions in a rural area, those valued below $400,000 would be exempt from appraisal if no state-certified or state-licensed appraiser is available. That provision reflects language contained in last year’s Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA, S. 2155). The agency pointed out that the exemption provided in EGRRCPA is self-implementing so credit unions may avail themselves of the law’s exemption immediately (provided the transaction meets requirements under the rules).

NCUA noted that it received 87 comments about the appraisals proposal, pointing out specific differences of opinion among interest groups. “In general, all of the comments received from appraisal- and bank-related interests objected to the proposed $1 million threshold,” NCUA wrote. “In contrast, most commenters associated with the credit union industry favored the $1 million threshold and other changes in the proposed rule.” (NASCUS was one of those groups supporting the threshold for the CRE loans.)

In voting for the rule, Board Chairman Rodney Hood called it common sense reform of current regulation that “that stands in the way of productive borrowing and lending, especially in rural areas.” He listed as his reasons for supporting the final rule that the existing threshold of $250,000 for the appraisal exemption has been in place since 2002, and pointed out shortages of appraisers in rural areas, particularly in the Midwest. He asserted that the final rule presents no safety and soundness concerns, and stressed that the higher threshold applies only to commercial loans, not residential ones.

Board Member Mark McWatters joined Hood in voting for the rule, but Harper split with both, calling the magnitude of the increase in the threshold too large and suggesting that it should have been made in smaller, incremental steps. He also asserted that NCUA’s $1 million CRE appraisal threshold was “leapfrogging other federal regulators,” and raised the issue of regulatory arbitrage (where firms capitalize on loopholes in regulatory systems in order to circumvent unfavorable regulation).

Final Rule, Part 722, Real Estate Appraisals: Item 4a,  Item 4b, Item 4c

Ito: New appraisal rule offers effective regulatory relief

NASCUS President and CEO Lucy Ito said the state system commends the NCUA Board for modernizing the agency’s appraisal rule. “By increasing the threshold for which appraisals would be required for commercial real estate transactions, incorporating S. 2155’s relief for rural communities, and restructuring the regulation to make it easier to determine what is required, credit unions and their members may realize effective regulatory relief,” she said. “We will continue to examine the rule in consultation with our members and look forward to providing the state system perspective to NCUA as it updates its exam procedures and guidance, National Supervision Policy Manual and examiner training to reflect the final rule.”

Agency gives unanimous thumbs up to two additional actions

In other action, the federal regulator board unanimously approved:

  • A final rule on fidelity bonds, which the agency said strengthens a board of directors’ oversight of a federally insured credit union’s (FICU) fidelity bond coverage; ensures an adequate period to discover and file fidelity bond claims following a FICU’s liquidation; codifies a 2017 NCUA Office of General Counsel legal opinion that permits a natural person credit union’s fidelity bond to include coverage for certain credit union service organizations (CUSOs); and addresses board approval of bond forms. In its comment letter, NASCUS had questioned whether the rule should apply to federally insured, state-chartered credit unions (FISCUs), and urged the agency to seek comment on that question. But NCUA responded (in its explanation of the final rule) that the board’s “public and longstanding position” is that that the entirety of its rules on fidelity bonds apply to FISCUs. The final rule takes effect 90 days after publication in the Federal Register.
  • The “second-chance” IRPS proposal, regarding statutory prohibitions from participating in the affairs of a credit union imposed on any individuals working at a credit union who have been convicted of criminal offenses, or other “breaches of trust.” The “second chance” IRPS would, essentially, tone down the extent of the prohibitions – especially for those who were convicted (or entered a diversionary program) for offenses they may have committed as youths. Specifically, the proposal would not require an application to the NCUA Board for eligibility to work again at a credit union for offenses including 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. NCUA Board Chairman Hood said he was personally committed to more initiatives such as the “second chance” proposal, and told the audience to “expect more coming from this agency to work with second-chance individuals.” The IRPS was released with a 60-day comment period.

Final Rule, Parts 704 and 713, Fidelity Bonds, Item 2a,  Item 2b

Proposed Interpretive Rule and Policy Statement, Guidance Regarding Prohibitions Imposed by Section 205(d), Item 3a,  Item 3b

FASB proposes CECL compliance extension to 2023

Credit unions, privately held banks and other smaller entities received another one-year extension to comply with the new accounting standard on current expected credit losses (CECL), following a vote on a proposal this week by the standards-setting board for the accounting profession.

The Financial Accounting Standards Board (FASB) voted to propose the one-year extension, which means that credit unions (and most lenders) wouldn’t have to comply until 2023, if the proposal is made final. The board had previously extended the compliance date to 2022 just last fall (a one-year extension from the previous date). The proposed extension is subject to public comment by the FASB, following the board’s procedure. However, given the outcry from a number of organizations about the standard – which is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations – it’s likely the extension will be supported and ultimately adopted.

Political pressure has also been building over compliance with the accounting standard. Also this week, moments before the FASB voted to issue its proposal, Rep. Blaine Luetkemeyer, R-Mo. and ranking member of the House Financial Institutions Subcommittee, said at the start of a committee hearing that “it’s irresponsible to blindly implement CECL before the economic effects are fully understood.” Luetkemeyer noted that he had joined a bipartisan group of House members supporting legislation (H.R. 3182) to “stop and study” the CECL standard’s impact on smaller institutions, including credit unions.

During the FASB hearing, Board Member Hal Schroeder noted that smaller organizations are capable of compliance with CECL by 2022, but it would be “a compliance exercise.” He added that, in order to comply with CECL “in a thoughtful manner,” credit unions and others need more time. “To me, that’s the winning argument,” he said.

H.R. 3182, CECL ‘Stop and study’ legislation

Suspicion that an older adult is the target or victim of financial exploitation should be reported by credit unions and banks to local, state or federal authorities – including through use of a Suspicious Activity Report (SAR) with federal authorities, CFPB said this week.

In a release, the bureau said it had issued an updated advisory that builds on the agency’s earlier recommendations on elder financial abuse. The advisory also reflects recent research on the abuse, the agency said, which contains voluntary best practices to help financial institutions prevent and respond to the abuse.

The agency said its research report – published in February and based on a study of 180,000 SARs reporting elder financial exploitation (EFE) — found that the abuse is “widespread and damaging,” resulting in an average loss of $41,800 among adults above the age of 70 who sustained a loss, with 7% of those losing more than $100,000.

“The Bureau’s analysis of SARs found that less than one-third of EFE SARs (28%) state that the filing institution also reported the activity directly to Adult Protective Services, law enforcement or other authorities,” CFPB said. “As of April 2019, 26 states plus the District of Columbia mandate reporting of suspected EFE by financial institutions or specified financial professionals.”

This week’s advisory was released in advance of a webinar upcomig Thursday  on elder financial abuse prevention, sponsored by federal financial institution regulators (including CFPB).

CFPB: Reporting of Suspected Elder Financial Exploitation by Financial Institutions

Report: One-in-four consumers have a debt in collection

More than one-in-four consumers with a credit report have at least one debt in collection by the nation’s 9,330 third-party debt collectors and buyers, according to a report issued this week by the CFPB. Drawn for the period of 2004-18 from the CFPB’s Consumer Credit Panel (CCP), a nationally representative sample of approximately 5 million de-identified credit records maintained by one of the three nationwide credit reporting companies, the report stated that 28% of consumers in the CCP had at least one third-party collection on their files. The bureau said the study also found that more than three-in-four third-party collections tradelines are for non-financial debt, and 58% of the tradelines are for medical debt. Another 20% for telecommunications or utilities debt. Positive payment information is generally not furnished for medical or telecommunications debt.

Market Snapshot: Third-Party Debt Collections Tradeline Reporting

Leadership voting re-elects four to seats on board, council

Two regulators are re-elected to the NASCUS Board of Directors, and two credit union leaders were chosen by their peers to remain on the NASCUS Credit Union Advisory Council.

Steve Pleger and Janet Powell were both re-elected for three-year terms on the NASCUS Board of Directors. The terms will run through the NASCUS 2022 Annual Meeting. Pleger is senior deputy commissioner for the Georgia Department of Banking & Finance (and a former chairman of the NASCUS Board). Powell is manager of the credit union program for the Oregon Division of Finance and Corporate Securities (in the state’s Department of Consumer and Business Services).

Re-elected to the NASCUS Credit Union Advisory Council are Rick Stipa and Brian Wolfburg. Stipa, who is the current chairman of the advisory council, is president and CEO of TruMark Financial CU, in Fort Washington, Pa. (assets: $2.3 billion). Wolfburg is president and CEO of Vystar CU in Jacksonville, Fla. (assets: $8.6 billion). The pair were re-elected to three-year terms that will continue through the NASCUS Annual Meeting in 2022.

“Congratulations to Steve, Janet, Rick and Brian,” said NASCUS Board Chairman John Kolhoff. “And thanks to them, and all of our board and advisory council members, for their time given and support for NASCUS – as well as their commitment to the state credit union system.”

2019 Summit sets stage for 2020 — in New York City!

While the 2019 NASCUS State System Summit In San Francisco is just around the corner (Aug. 13-16 at the Westin St. Francis on Union Square), plans are already being made now for the 2020 Summit – in New York City. Set for August 9-12, 2020, the headquarters for next year’s event is at the New York Marriott Downtown hotel, just blocks away from Wall Street. As with past Summits (including 2019), next year’s event will focus on exchange between regulators and credit union practitioners, with discussion of the key issues affecting the state credit union system. Watch the NASCUS website for more information on the 2020 Summit – as well as your mail! Meanwhile, nearly 150 (and counting) participants are headed to San Francisco next month for the 2019 Summit.

NASCUS 2019 State System Summit, Aug. 13-16, San Francisco

BRIEFLY: Agency puts more resources toward MERIT

During a mid-year budget briefing (and review) for the NCUA Board Thursday, agency Chief Financial Officer Rendell Jones noted that NCUA is funneling an additional $410,000 to its Modern Examination and Risk Identification Tool (MERIT), the examination system replacing the venerable (and outdated) AIRES tool. Jones told the board that nationwide deployment of MERIT is expected next year, and the additional money is needed to ensure development continues on schedule. NASCUS has been working closely with the agency on behalf of the state system, and regulators, to introduce the tool.

NCUA mid-session budget review, memo


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