THIS WEEK: NCUA Board takes action on FOM, OTR; Ito supports state membership rules; Proposals focus on CECL, FCU fees – budget reviewed; NCUA nominee vote postponed to next week; NASCUS backs corporate proposal; Alert details mortgage service forbearance; Pandemic boosts complaint numbers; ND gets one-year appraisal waiver; Five seats elected to NASCUS leadership seats; BRIEFLY: Webinar looks at export financing
Board issues new FOM rule,
calls for comments on OTR
A final rule on field of membership (FOM), and a request for comment on the methodology behind the overhead transfer rate (OTR) – the rate at which the federal credit union insurance fund covers “insurance-related costs” of administering the NCUA – were both issued at Thursday’s agency board meeting.
Final field of membership rule issued
The final membership rule came about after the legal challenge to the agency’s rules in that area ended last month when the Supreme Court declined to hear a challenge from the banking industry. The bankers had brought a lawsuit against the agency over rules adopted in 2016 amending its FOM requirements.
While the banks partially prevailed in a 2018 verdict by a federal district court, that decision was overturned at the appeals level the following year. The banks attempted to seek a hearing of that ruling by the Supreme Court this year, but were rebuffed.
The final rule issued Thursday (which would take effect 30 days after publication in the Federal Register) would essentially restore the rule adopted by the agency in 2016, which was partially suspended after the 2018 court decision. More specifically, the agency said the rule re-adopts a provision to allow an applicant to designate a Combined Statistical Area (CSA), or an individual, contiguous portion thereof, as a well-defined local community (WDLC), provided that the chosen area has a population of 2.5 million or less.
“Separately, in accordance with an August 2019 opinion and order issued by the D.C. Circuit Court of Appeals with respect to communities based on a Core-Based Statistical Area (CBSA) or a portion thereof, the rule provides further explanation and support for the elimination of the requirement to serve the CBSA’s core area, as provided for in a 2016 final rule,” the agency noted.
The final rule also, the agency said, clarifies existing requirements and adds an explicit provision to the FOM rules to address concerns about potential discrimination in the FOM selection process for CSAs and CBSAs.
In response to the 2019 ruling by the appeals court, NCUA said the final rule amends the FOM rules with respect to applicants for a community charter approval, expansion, or conversion.
NASCUS, in the past, has supported the efforts of NCUA to strengthen the FCU FOM regulations as a way of boosting the entire credit union system – including state credit unions. “NASCUS appreciates the agency’s efforts to strengthen the federal charter by widening access to financial services for members of modest means and providing greater choice and flexibility for consumers and federal credit unions,” she said last year when the agency considered amending its FOM rules in line with the appeals court’s decision. She added that that state system “has long held that a competitive federal charter is essential for a strong dual charter system, that benefits all credit unions – both state and federal.”
No changes to OTR, but comments sought on methodology
In addition to the membership regulation, the agency board issued a comment request on the methodology it uses to determine the OTR. The request was issued in tandem with a request for comments about the operating fees federal credit unions must pay to partially fund the agency.
Importantly, the board proposed no changes to the OTR methodology. Instead, however, in accordance with its promise made in 2017 to seek comment on the methodology every three years, the board is asking credit unions to weigh in on how the OTR is working so far. The methodology is focused on assigning a percentage share of work to insurance costs in four categories of activities, according to NCUA – and the agency is looking for comments in each of those areas:
- 50% insurance related: Time spent examining and supervising FCUs.
- 100% insurance related: All time and costs the NCUA spends supervising or evaluating the risks posed by FISCUs or other entities the NCUA does not charter or regulate (e.g. third-party vendors and credit union service organizations).
- 0% insurance related: Time and costs related to the NCUA’s role as charterer and enforcer of consumer protection and other noninsurance based laws governing the operation of credit unions, for example, field of membership requirements.
- 100% insurance related: Time and costs related to the NCUA’s role in administering federal share insurance and the Share Insurance Fund.
NASCUS’ Ito commended the board for a “more transparent and fair approach to determining the OTR that has been in place since 2017. As Board Member McWatters noted, there is always room for improvement and we look forward to sharing our perspectives with the agency to ensure the OTR is calculated in an equitable fashion.”
Ito: State membership rules protect members
During the discussion of the FOM rule, Board Member Todd Harper indicated that the banking industry should no longer object to NCUA’s FOM rules, but instead target state field of membership provisions. NASCUS CEO Lucy Ito said the state system strongly rejects that view.
“State supervisory agencies have taken great care to ensure that credit unions in their states have the appropriate fields of membership to adequately serve their members,” Ito said in a press statement. “We have long asserted that the healthy competition of a strong dual charter system is beneficial to both federal and state-chartered credit unions and the final passage of NCUA’s field of membership rule is a step in that direction.”
Ito added that, as the insurer of state-chartered credit unions, it is inappropriate for an NCUA board member to suggest attacks of any kind on either state-chartered credit unions or state credit union regulators. “We are gravely disappointed that Mr. Harper chose to ignore his responsibility as the federal insurer of credit unions to treat both federal and state-chartered credit unions in a neutral and unbiased manner.”
Proposals issued on CECL, FCU fees; budget reviewed
In other action, the NCUA Board proposed a rule to phase in the “day-one adverse effects” of the current expected credit losses (CECL) accounting standard, proposed another rule on the annual operating fee FCUs pay to partially fund the agency, and heard a report on the performance of its 2020 budget (and, in the process, made no adjustments to it).
CECL proposal offers phase-in of adverse effects
Under the proposal (issued with a 60-day comment period), day-one, adverse effects on regulatory capital that could result from credit unions’ adoption of the CECL standard – set for most credit unions to begin no later than December, 2022 – would be phased over a three-year period. The proposal, NCUA said, is consistent with regulations already issued by the federal banking agencies.
“For purposes of determining a federally insured credit union’s (FICU’s) net worth classification under the prompt corrective action regulations, the Board will phase-in the day-one effects on a FICU’s net worth ratio over a three- year period (12 quarters),” the agency stated. “The phase-in would only be applied to those FICUs that adopt the CECL methodology for fiscal years beginning on or after Dec. 15, 2022 (the deadline established by the Federal Accounting Standards Board for CECL implementation).” In other words, those credit unions that choose to adopt CECL for fiscal years prior to the 2022 date, the agency said, will not be eligible for the proposed phase-in.
Additionally under the proposal, FICUs with less than $10 million in assets would no longer be required to determine their charges for loan losses in accordance with generally accepted accounting principles (GAAP), but would instead be allowed to use any reasonable reserve methodology, “provided that it adequately covers known and probable loan losses.”
NASCUS’ Ito lauded NCUA for joining with the banking agencies on mitigating the impact of CECL through the phase-in. “We will closely examine the proposed rule to check for any conflicts with state laws and regulations and to recommend any improvements to ensure reasonable implementation of CECL for federally insured state-chartered credit unions,” she said.
FCU operating fee assessment would exclude PPP loans
In another proposal (also issued for a 60-day comment period), the agency board said it wants to exclude from the calculation of the operating fee any loan an FCU reports under the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) or “similar future programs the Board may decide to exclude.” The proposal is similar to those issued by the federal banking agencies for the institutions they supervise. The proposal would also delete from current rules references to programs that no longer exist (specifically, the Credit Union System Investment Program and the Credit Union Homeowners Affordability Relief Program).
In addition, the proposal would change the period used for calculating an FCU’s total assets for purposes of assessing the fee. Under the proposal, total assets would be calculated as the average total assets reported on the FCU’s previous four call reports available at the time the board approves the agency’s budget for the upcoming year. (Now, the total assets are computed based on the Dec. 31 call report from the preceding year, even though the NCUA budget is typically finalized in November of the preceding year.)
No adjustments made to 2020 budget
In conducting its annual mid-year budget review, the board made no adjustments to its annual spending plan – a break from past years when the board has typically approved reductions. However, agency staff told the board that it expects NCUA will post a small, year-end surplus compared to the budget approved by the board for 2020.
Panel postpones Hauptman vote; McWatters to stay put
A vote scheduled Thursday on a recommendation for Kyle Hauptman to be confirmed as a member of the NCUA Board was postponed by the Senate Banking Committee; the committee has reset the vote for Aug. 5.
Hauptman was nominated by President Donald Trump to fill a seat on the NCUA Board now occupied by J. Mark McWatters, whose term officially ended in August, 2019. McWatters has been serving in a hold-over capacity since then.
If he earns a recommendation from the committee to be confirmed by the full Senate, and the Senate votes to agree, Hauptman would serve the remainder of a six-year term that ends in 2025. Hauptman appeared before the committee last week at a confirmation hearing. The vote postponement also affects two nominees to the Securities and Exchange Commission, who also testified with Hauptman at last week’s hearing.
Meanwhile: In anticipation of Hauptman soon taking his seat on the board, at Thursday’s meeting McWatters expressed his thanks to both current and past board members, as well as others, for their support and collegiality. Both Board Chairman Rodney Hood and Member Todd Harper returned the compliments.
But McWatters also made it clear: He fully intends to remain on the board until Hauptman takes his oath of office after being confirmed by the Senate.
State system backs corporate proposal – with some changes
A proposed rule on corporate credit unions generally has won the support of the state credit union system, but a few recommendations have also been made to amend it, NASCUS said in the association’s comment letter on the rule this week.
In March, NCUA proposed amending its corporate credit union regulation – an effort, the agency said, to update, clarify and simplify a number of its provisions. Among the key changes, the proposal would: Permit a corporate credit union to make a minimal investment in a credit union service organization (CUSO) without the CUSO being classified as a corporate CUSO; expand the categories of senior staff positions at member credit unions eligible to serve on a corporate’s board; amend the minimum experience and independence requirement for a corporate’s enterprise risk management expert; and require a corporate to deduct certain investments in subordinated debt instruments issued by natural person credit unions.
Regarding the subordinated debt instruments, NASCUS wrote that it supported the approach, particularly as NCUA is considering a proposal to permit credit unions to implement the capital-building device. “Given the interconnectivity of the credit union system and the prudence of mitigating the potential of cascading losses we understand this prescription,” NASCUS wrote.
However, regarding the other key changes, NASCUS offered some reservations. Regarding CUSO investments, the association noted that permitting corporates to make minimal investments in natural-person CUSOs will support innovation. However, NASCUS wrote that it opposes incorporation by reference of its regulation on a credit union’s commercial loan policy to a corporate’s lending to CUSOs. Noting that its rule on corporates is self-contained (as Part 704), NASCUS urged that “Rather than complicate compliance by placing the burden on credit union staff to cross reference the natural person commercial lending rule, NCUA should include any additional due diligence requirements within the text of Part 704.”
About other provisions, NASCUS:
- Supported broadening corporate credit union board eligibility and urged the agency to defer to state rules for state credit unions on board governance matters. “There is no evidence so doing would increase risk to the share insurance fund. While we appreciate NCUA’s desire for uniformity, we believe that the homogenization of the corporate credit union system presents its own risks by stifling innovation,” NASCUS wrote. The association also said it supported a provision requiring disclosure of executive compensation for dual employees of the corporate and a natural-person credit union CUSO.
- Backed broadening corporate board eligibility. “As we have previously noted, there are various backgrounds of senior credit union managers that could provide valuable experience to a corporate credit union board,” NASCUS wrote. Again, the association counseled the agency to defer to state rules with regard to state credit union board qualifications.
- Recommended further amending the agency’s enterprise risk management (ERM) rules, in particular by allowing corporates to manage the ERM function internally, eliminating prohibitions in the rules related to supervision of the risk management expert at the corporate. “NASCUS believes that the enterprise risk management function can be responsibly fulfilled by a qualified employee that has independence and access to direct reporting to the board while simultaneously being part of the management team and subject to the supervision of the CEO or the CEO’s designee,” NASCUS wrote. “Ultimately, the credit union’s CEO is responsible for the executive team and answers to the board of directors. So should be the case with the risk management function.”
- Opposed removing approved corporate activities from the agency’s website, as proposed, and instead supported incorporating those activities into the regulation itself as an appendix. NASCUS said its opposition was rooted in the state system’s belief that “incorporating approved activities into the regulation itself will hinder the efficient administration of this provision as future approved activities would require Notice and Comment,” NASCUS pointed out. “As the list of approved activities is readily available to the public and corporate credit unions, nothing is gained by incorporating the list directly into an new Appendix. Rather, the administrative process would add delay and hamper the ability of corporate credit unions to obtain timely determinations of proposed new activities.” NASCUS also urged the agency to add a provision requiring the agency to consult with state regulators before making a determination on “other activities” for state-chartered corporates.
NASCUS also offered some additional suggestions (including a comprehensive re-evaluation of the agency’s corporate rules to promote greater flexibility in serving credit unions), which include:
- Forming a task force with state regulators to review future adjustments to the corporate credit union rules;
- Reintroducing meaningful dual chartering by eliminating unnecessary preemption of state rules, particularly with respect to corporate credit union governance; and
- Enhancing the joint supervision of corporates and their risk to natural person credit unions by formalizing increased information sharing between NCUA and the state regulators supervising the corporate credit union’s natural person credit union members.
Alert details interim rule on mortgage service forbearance
An interim final rule detailing how mortgage servicers can provide COVID-19-related forbearance based on their evaluation of limited information collected from a borrower – and which took effect July 1 – is outlined in a Regulatory Alert issued this week by NCUA.
In its alert 20-RA-06, NCUA noted that the interim final rule, issued in June by the CFPB, added a temporary exception in Subpart C to Regulation X (Real Estate Settlement Procedures Act, or RESPA) for certain COVID-19-related loss mitigation options. The interim rule, if certain criteria are met, allows a loan mortgage servicer to offer a borrower a loss mitigation option based on its evaluation of limited information collected from a borrower (rather than a “complete” application).
NCUA noted the exception allows credit unions and their affiliates to align their loss mitigation programs with the criteria of the Federal Housing Finance Agency’s (FHFA) COVID-19 payment deferral or other comparable programs.
The agency’s notice pointed out that credit unions must comply with other Reg X requirements after a borrower accepts a loss mitigation offer. For example, if a mortgage loan becomes delinquent again (at any time), a credit union would have to satisfy the rule’s early intervention requirements; if the borrower submitted a new loss mitigation application, the credit union would have to comply with the usual loss mitigation procedures, the agency notes.
The agency also stated that credit unions that qualify as small servicers under Reg X – entities that service 5,000 or fewer loans that they or their affiliates own or originated – are not subject to relevant portions of the reg and aren’t affected by the interim final rule on COVID-19 relief. However, they are subject to the Reg X prohibition on certain foreclosure activities.
CFPB: Pandemic contributing to rising complaints numbers
About 5% of complaints received by the CFPB since the year began specifically referenced coronavirus, agency Director Kathleen Kraninger told a Senate panel this week. She also told the Senate Banking Committee that the agency has developed a supervisory program to target consumer risk related to the pandemic.
Kraninger told the committee that from Jan. 1 through July 26, consumers submitted more than 270,000 complaints to the CFPB of which more than 14,000 complaints specifically referenced coronavirus. She said that each month from March through June set a monthly record for complaints received by the bureau.
“In March 2020, we saw a notable increase in inquiries related to trouble making mortgage payments,” she reported to the committee in her written testimony. “Those inquiries also highlighted concerns about when deferred payments would be due after the CARES Act forbearance period.” She referred to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted March 27 to counter the growing financial impact of the coronavirus crisis.
She said those complaints were instrumental in prompting the Bureau to “work expeditiously with our interagency colleagues to address the lump sum payment issue and the concerns regarding consumer confusion around CARES Act forbearance options.”
Compared to all complaints the bureau has recently received on consumer protection topics, pandemic-related complaints are relatively few of the rising number of complaints received by the bureau. For example, credit and consumer reporting continues to draw the most complaints overall, accounting for 63% of all complaints received in May and June (which totaled 36,369 complaints in May, and 36,388 in June).
In other comments, the bureau director told the committee that it has developed a “new, targeted supervisory approach” dubbed “Prioritized Assessments” to focus on the institutions and markets that pose the greatest risk of consumer harm resulting from pandemic-related issues.
In her written testimony, Kraninger said the program consists of “high-level inquiries designed to obtain information entities to assess the impact on consumer financial product markets due to pandemic-related issues.” She said the assessments will allow CFPB to identify potential risk to consumers across a large number of organizations, “while continuing to reduce the burden on institutions and allowing examiners to continue to work safely from their home-duty stations.”
ND gets approval for another one-year appraisal waiver
A one-year extension of a temporary appraisal waiver for North Dakota was recommended this week by the appraisal subcommittee of the FFIEC, following a request by regulators and financial institutions in the state.
The temporary appraisal waiver was first granted a year ago by the FFIEC (which must still approve the subcommittee’s recommendation made Wednesday). North Dakota had sought the additional time for the appraisal waiver partly because of the financial impact of the coronavirus crisis.
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. North Dakota sought a two-year extension of the waiver, but the exam council’s appraisal subcommittee decided to stick to its earlier recommendation of a second, one-year extension.
Five seats filled in leadership election
One new member will join NASCUS leadership, and four current leadership members will continue their roles, as a result of board elections completed this week. The members of the state system leadership will take their seats for their three-year terms on Aug. 26 during the NASCUS virtual Annual Meeting.
Katie Averill, superintendent of the Iowa Division of Credit Unions, was elected to the NASCUS Regulator Board for the first time. Re-elected to the board were Rose Heston Conner, administrator, North Carolina Credit Union Division and Charles Vice, commissioner, Kentucky Department of Financial Institutions.
Members of the NASCUS Regulator Board are elected by regulator members of NASCUS, comprised of all state credit union regulatory agencies across the nation.
At the same time, two members of the NASCUS Credit Union Advisory Council were re-elected to positions. Jason Boesch, manager, Energize CU, Oklahoma City, Okla., and Mike Ryan, senior vice president and general counsel, BECU, Tukwila, Wash., will again serve three-year terms.
Members of the NASCUS Credit Union Advisory Council are elected by credit union members of the council, which are mostly state-chartered credit unions from across the nation. The council advises the Regulator Board on issues of importance to credit unions.
NASCUS Regulator Board Chairman John Kolhoff, and Credit Union Advisory Council Chairman Rick Stipa, congratulated the winners and thanked all candidates for participating in the election.
BRIEFLY: Agency plans webinar on export financing
“Export Financing for Your Small Business Members,” is the topic of a webinar scheduled to be hosted Aug. 19 by NCUAand feature Export-Import Bank staff providing a look at the bank’s Working Capital Loan Guarantee Program. The agency said this program provides a 90% guarantee against loans to exporters, and all EXIM-guaranteed loans are exempt from the credit union member business lending cap. The agency said EXIM staff will also discuss export credit insurance, which protects U.S. exporters against payment risk from their foreign customers. The agency and the bank signed a “Memorandum of Understanding” on June 9 that launched a three-year collaboration to bring credit unions and small businesses together and raise awareness about the EXIM’s programs. See the link below for more information.
For more information about NASCUS publications, or to obtain permission to reprint a NASCUS publication, please contact NASCUS' Communications Department.