June 21, 2019 NASCUS Report

Board proposes two-year delay for RBC;
will look at subordinated debt, other changes

A two-year delay in the effective date of the risk-based capital (RBC) rule for complex credit unions would be in place under a proposal issued for comment by a split NCUA Board Thursday – but the delay could also open the door to a form of supplemental capital for credit unions.

One of the reasons staff gave the board for the two-year delay: it provides time for the agency to develop, consider and possibly adopt a rule on subordinated debt for credit unions (a form of supplemental capital), and other changes to capital rules. Those changes, according to the agency, if ultimately approved could be timed to go into effect at the same time as the new effective date of the RBC rule (Jan. 1, 2022).

But the proposal to delay the RBC rule – which now is slated to take effect at the beginning of next year – is not without controversy. While both Chairman Rodney Hood and Board Member Mark McWatters voted to issue the delay proposal (for a 30-day comment period), Board Member Todd Harper voted no.

In presenting the proposal for the RBC rule delay, NCUA staff also noted that other changes are under consideration for its capital rules. They underscored that the delay would give the board time to consider proposals, seek public comment, and then consider adoption of additional final rules. Those other changes include subordinated debt, capital requirements for asset securitization, and an equivalent to the community bank leverage ratio (CBLR) developed by the federal banking agencies for banks and thrifts. A final rule on CBLR (which is equal to 9% for banks under $10 billion in assets that meet certain criteria) is still under development by the banking agencies, although a final rule could be ready later this summer.

A delay in the effective date to 2022 of the RBC rule holds some additional effects: two of the three members of the current NCUA Board will have completed their terms by that time. McWatters’ term ends in August, Harper’s term expires in April, 2021. Both, however, may remain on the board (if they choose) until a successor is confirmed by the Senate.

In a release, NCUA noted that the original effective date for the RBC rule was Jan. 1, 2019. Last October, the release noted, the board unanimously approved a delay in the effective date to Jan. 1 of next year, and raised the asset threshold for a complex credit union from $100 million to $500 million. The agency said that, based on call report data from year-end 2018, if the RBC rule were in effect now, 545 complex credit unions would be subject to its requirements, and more than 99% of all complex credit unions would be considered well-capitalized.


Staff presentation: Proposed Rule Part 702 Risk-Based Capital

NCUA Board Action Memorandum: Proposed delay in RBC rule effective date

Proposed rule, delay effective date of risk-based capital, Part 702.

Hood, McWatters give thumbs up to delay

In his remarks supporting the proposal, Hood offered strong support for moving forward on a subordinated debt proposal in conjunction with the delay. “As chairman I intend to ensure that a subordinated debt proposal is taken up by this board by the end of this year,” Hood said, repeating his words for effect.

Regarding the other two areas of proposed changes to capital rules (to be considered during the additional time before the new effective date for RBC), Hood called asset securitization “a complex activity” that comes with various forms of risk including credit risk. “Since this authority was recently identified as available to credit unions, the NCUA’s requirements including capital standards need to be updated accordingly,” he said.

On a CBLR equivalent for credit unions, Hood said he was “intrigued” with the bank regulators’ proposal, which implements provisions from last year’s regulatory relief legislation (the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA, S. 2155)). He described the proposed CBLR as “the potential way to simple but effective relief for credit unions. It will provide them with that simple relief if they maintain strong capital levels. It has the real potential to be a win-win for credit unions and the (National Credit Union) Share Insurance Fund.

McWatters, before voting for the proposal, noted that he had twice in the past voted against the RBC rule when it came before the board, arguing that it violated the Federal Credit Union Act (FCUA). He said the two-year delay would give the agency time to analyze the RBC rule again and work to make it compliant with the FCUA.

Harper gives thumbs down; calls delay ‘bad policy’

The third member of the board, Harper, voted no on the proposed delay, saying it was time to move forward now on the RBC rule, and retain the effective date of Jan. 1. “I approach this proposal with great skepticism and have to agree to disagree,” he said. Referring to the current RBC effective date he said the agency needs to implement, and not further delay, “this important safety and soundness regulation” describing a further delay as “bad policy.” Before making those comments, Harper engaged in a one-hour question-and-answer period with NCUA Examination and Insurance Director Larry Fazio, going over the history of the RBC rule and other aspects of capital rules for credit unions and banks.

However, the third NCUA Board member said – despite his vote against the proposal – he is willing to work on separate topics such as subordinated debt authority, asset securitization, and a CBLR-type rule for credit unions.

NASCUS: praise for subordinated debt commitment

In a statement, NASCUS President and CEO Lucy Ito commended the board for its commitment for a subordinated debt rule proposal by year’s end. “We agree with Chairman Hood that it is sensible for credit unions to use subordinated debt to meet capital requirements and protect the National Credit Union Share Insurance Fund,” Ito said. She noted that the state credit union system has long held that subordinated debt should be a part of the risk-based capital framework because it encourages well-managed credit unions to attract additional loss-absorbing forms of capital that they would otherwise forego.

“Indeed, the point of risk-based capital rulemaking is to increase the capital buffer standing before the share insurance fund and subordinated debt is wholly consistent with that goal,” she said. “NASCUS will continue to engage with NCUA as it develops the rule to bring state regulator experience to the dialogue.”

Summary outlines four key areas of non-member deposits proposal

Federally insured credit unions allowed to take non-member deposits would need to develop and maintain a written plan if their non-member shares – along with borrowings – exceed 70% of paid-in and unimpaired capital and surplus under a proposal by NCUA, according to a new summary posted by NASCUS.

In its summary of NCUA’s proposed changes issued last month to federal credit union (FCU) rules for public unit and non-member shares (which apply to federally insured state credit unions (FISCUs) by reference in section 741.204 of NCUA’s rules), NASCUS pointed out that if state law allows a FISCU to accept public deposits or non-member deposits, Section 741.204(a) of NCUA’s rules requires the state-chartered credit unions to adhere to the FCU limits of §701.32(b) of NCUA rules.

Specifically, the NASCUS summary notes that the proposed rule would:

  • Allow federally insured credit unions (those that are allowed to take non-member and public unit deposits) to accept up to 50% of the credit union’s paid-in and unimpaired capital and surplus less any public unit and non-member shares. “By excluding the public and non-member deposits from the calculation NCUA seeks to limit the ability of a credit union to increase its leverage indefinitely, which could pose a risk to the National Credit Union Share Insurance Fund (NCUSIF),” NASCUS wrote.
  • Eliminate an alternative $3 million limit on total public unit and non-member shares (noting that the 50% limit is sufficient). But NCUA also wants to know whether eliminating the $3 million threshold would harm smaller credit unions that might rely on larger volumes of nonmember shares as a necessary source of funding. The agency also seeks comment about whether smaller credit unions, or low-income designated ones, should be allowed to apply for a higher threshold than the proposed 50% limit or whether the $3 million (or higher) alternative dollar threshold should be retained.
  • Eliminate the waiver process (through the NCUA regional director) for deposits in excess of the proposed limit (which, effectively, limits the non-member shares to 50% of paid-in and unimpaired capital and surplus).
  • Require federally insured credit unions (those that may take non-member deposits) to develop and maintain the written plan if public unit and non-member shares, taken together with borrowings, exceed 70% of paid-in and unimpaired capital and surplus.

Comments are due to the agency by July 29.

NASCUS Summary: NCUA Proposed Rule Part 701 and Part 741, Unit and Nonmember Shares

Delay of underwriting provisions in payday rule outlined

A summary outlining the CFPB’s decision to delay to next fall the compliance date for mandatory underwriting provisions of its rule on payday lending is the latest to be developed and posted by NASCUS. In the summary, which outlines the delay to Nov. 19, 2020 (from this August) of the underwriting provisions in the bureau’s rule on Payday, Vehicle Title and Certain High-Cost Installment Loans, NASCUS notes that CFPB took action for two reasons: the bureau believes it has strong reasons to revisit the mandatory underwriting provisions on the grounds provided in the notice of proposed rulemaking that reconsiders the 2017 final rule, and; the bureau concludes that if the mandatory underwriting provisions went into effect in in August, at the same time the bureau was still considering the appropriateness of the 2017 final rule, there would be detrimental consequences for businesses that are impacted.

NASCUS Summary: Final Rule on Payday, Vehicle Title and Certain High-Cost Installment Loans; Delay of Compliance Date; Correcting Amendments

NASCUS offers explicit support for cannabis legislation …

Explicit support for national legislation to make it permissible for credit unions to serve authorized cannabis businesses and third-party outlets is a new policy recently adopted by the NASCUS Board.

The NASCUS Board, made up of state regulators, adopted the policy at its June meeting.

The newly approved cannabis banking policy moves NASCUS from merely calling for clarification—permissible or impermissible—to explicitly supporting federal legislation making it permissible for financial institutions to provide financial services to state authorized cannabis businesses and to third-party businesses that serve the cannabis businesses.

“Financial institutions in states that have legalized some form of cannabis use should be able to provide financial services to the state-sanctioned cannabis business in their communities,” said NASCUS President and CEO Lucy Ito in announcing the new policies. “Without access to the financial system, these businesses would have to operate in cash, which can lead to tremendous public safety issues and fraud instances.”

Ito said the new NASCUS policy supporting credit union and financial institution service to cannabis businesses “would ensure credit unions could serve their members and meet the needs of their communities by providing secure, financial services.” (See item below about next week’s NASCUS Cannabis Symposium in Universal City, Calif.)

NASCUS Public Policies; June 6, 2019 (PDF file format)

… and adopts policy on cybersecurity legislation, too

The board also adopted new policies related to cybersecurity, which supports federal legislation which applies cybersecurity requirements and disclosure obligations to merchants that handle consumers’ personally identifiable information and personal financial information, and preserves the authority of states to regulate and supervise cybersecurity and privacy protections for the benefit of their citizens by setting federal standards only as a floor, not a ceiling, for state specific protections

NASCUS’s Ito noted that the vast majority of organizations responsible for data breaches are not financial institutions and are not subjected to the same rigorous requirements as financial service providers. She said federal cybersecurity legislation should therefore require any entity that collects or stores personally identifiable information to be held responsible for protecting that data and informing the public when data security measures fail.

“Further, many states have data security regulations and breach notification requirements in place,” she said. “Where a state has an existing data security and breach notification structure in place that provides for more stringent protections, deference should be given to the state law.  We believe a state’s legislature and state supervisory agency are best equipped to determine the most effective means to protect its consumers.”

Hearing will consider ND waiver of appraisal requirements

Consumers are being harmed by the scarcity of qualified appraisers, which has led to a request for a waiver of required appraisals and a hearing on that request early next month, spurred by North Dakota financial institution supervisors. The North Dakota Department of Financial Institutions, backed the state’s governor and financial institutions in the state, requested a waiver of at least five years of federal appraiser requirements for residential and commercial real estate transactions involving less than $500,000 and $1 million. The request was made to the Federal Financial Institutions Examination Council (FFIEC) Appraisal Subcommittee (ASC), which will hold a hearing July 9.

Specifically, the request seeks a waiver of appraiser credentialing requirements for appraisals for federally related transactions under $500,000 for 1-to-4 family residential real estate transactions and under $1,000,000 for agricultural and commercial real estate “for a period of not less than five years.” The request was actually made last year (Aug. 1) in a letter to the subcommittee from the NDDFI, Gov. Doug Burgum (R ) the state’s banker association. By this past April, the regulator made a complete waiver request to the subcommittee, which led to the scheduling of the hearing, preceded by a public comment deadline of July 1.

ASC Special Meeting – North Dakota Temporary Waiver Request

House panel OKs bill repealing with fringe benefits tax

The House Ways and Means Committee Thursday approved and sent to the full House legislation that would repeal the unrelated business income tax (UBIT) on fringe benefits. The committee approved, on a vote of 22-19, the Economic Mobility Act of 2019 (H.R. 3300), which contains the UBIT repeal language. That language was put in place by the 2017 Tax Cuts and Jobs Act of 2017 (TCJA), which extended UBIT to certain employee fringe benefits, requiring tax-exempt organizations currently subject to UBIT to pay effectively 21% on certain employee fringe benefits, particularly transportation and parking benefits. If ultimately enacted into law, HR 3300 would repeal the fringe tax back to the date of its enactment in 2017. (A subcommittee hearing on the issue, originally set for Wednesday, was canceled at the last minute, as the full committee explained the hearing would conflict with the panel’s work on appropriations bills.)

State system honors ID’s Mary Hughes with 2019 Pierre Jay Award

Mary Hughes, acting director for the Idaho Department of Finance, is the 2019 recipient of the Pierre Jay Award, honoring her career commitment to advance the state credit union system. She will be presented the award at the NASCUS State System Summit, Aug. 13-16 in San Francisco.

The annual award, sponsored by NASCUS, recognizes individuals whose contributions have benefited the state credit union system in a significant way. Recipients of the award best demonstrate outstanding service, leadership and commitment to NASCUS and the dual chartering system.

Hughes joined the Idaho Department of Finance in 1990 as a deputy attorney general, and has since served as the department’s lead attorney, Consumer Finance Bureau chief, Financial Institutions Bureau chief, deputy director, and acting director in 2017 and again in January 2019 to the present.

In addition to her career at the Idaho Department of Finance, she has served as a NASCUS officer and director, participating in several NASCUS committees and taskforces. Notably, she served on the NASCUS Board of Directors from 2009-13 and has served on the NASCUS Legislative and Regulatory Committee since 2006.

“Mary is a pillar in the state credit union system and a deserving recipient of the Pierre Jay Award,” said NASCUS’ Lucy Ito. “Her work to advance the national state credit union system is unparalleled. She has a profound commitment to the safety and soundness of Idaho credit unions, which has resulted in there being no failures during her tenure. Congratulations to Mary and thank you for your service to the state system.’”

NASCUS Pierre Jay Award

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

First-ever cannabis symposium sells out

Nearly 170 participants will gather in Universal City, Calif., next week – a sell-out crowd — for the first-ever NASCUS Cannabis Symposium, a two-day examination of the issues involved in providing banking services to legal businesses serving the burgeoning marijuana industry.

At least 11 states and the District of Columbia have legalized marijuana for recreational use for adults over 21 – and 33 states have legalized medical marijuana. Small businesses have sprung up to provide cannabis-related services in these states, including sales of marijuana and paraphernalia for using, growing or storing the product (among other things).

But federal law still prohibits the sale and use of marijuana – which has hampered the ability of credit unions and other financials in those states to provide banking services to the cannabis businesses.

The first-ever NASCUS Cannabis Symposium, next Tuesday and Wednesday, will explore an array of topics over the two-day event, giving credit union supervisors, practitioners and others the chance to discuss what their policies will be with respect to cannabis businesses seeking accounts.

Among the topics to be discussed: The business cycle of cannabis; BSA/AML compliance; cannabis and insurance; and the role of technology in cannabis compliance.

The event is being held at the Hilton Los Angeles/Universal City, 555 Universal Hollywood Drive, Universal City, Calif. See the link below for more program information.

NASCUS Symposium: Cannabis Banking

TRANSITIONS: New leaders in MA mark 6 weeks; NE names new official

New Massachusetts Commissioner of Banks Mary Gallagherand First Deputy Commissioner Cynthia Beginare marking their sixth week on the job, after being named to their new positions in early May. Gallagher previously served (since 2015) as Massachusetts Division of Banks (DOB) chief operating officer, following 17 years in the financial services sector. Begin previously served as chief risk officer for DOB since 2011, following more than 24 years in various roles in financial services regulation. Merrily Gerrish, who has been serving as acting DOB commissioner since December, resumes her duties as DOB General Counsel … In Nebraska, Darren Davisis now the credit union review examiner for the state’s Department of Banking and Finance. He replaces Kent Plummer, who has retired.

New Leadership Announced at the Division of Banks

BRIEFLY: Cybersecurity advisor to NCUA chairman named

Johnny E. Davis, Jr.,started Thursday at NCUA in the additional role as special cybersecurity advisor to Board Chairman Hood. He also serves as the agency’s division director for critical infrastructure, according to NCUA.

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