June 26, 2020 NASCUS Report

THIS WEEK: NCUA to begin payout from failed corporates; Virus surge disrupts NCUA on-site plans; Guidance urges flexibility during pandemic; Busy CFPB … Regs issued ‘underserved,’ forbearance … 2 proposals on GSE Patch … New ‘pilot advisory program’ outlined; 2019 HMDA data ready now; Still time to sign up for ‘managing during uncertainty;’ State system makes strong showing at international confab; BRIEFLY: Stress tests spur limits for big banks; MDI mentoring program deadline extended; NASCUS Report distributed Thursday next week

NCUA to begin payout of corporate capital
with $171 million to SW-member CUs

Credit unions that are former members of the failed Southwest Corporate Credit Union that held member capital accounts in the institution could see a payout of $171 million as early as next month, the NCUA Board was told Thursday — the vanguard of what the agency expects ultimately to be a total of as much as $2.5 billion to many (but not all) corporate credit union capital account holders over the next year.

Separate from that development, NCUA Board Chairman Rodney Hood also announced at the start of its regular June meeting Thursday that the board had voted to remove consideration of a proposed rule on risk-based net worth from its agenda. The board announced last week, when it published its meeting agenda, that the proposal would be considered. (In a tweet following the meeting, the chairman said the proposal was pulled from the meeting agenda because “I did not have a solid second vote to move this critical piece of regulatory relief forward.”)

Regarding the corporate payouts (or distributions), the board heard a briefing about the NCUA Guaranteed Notes (NGN), which provide long-term funding for distressed investment securities from the five failed corporate credit unions – U.S. Central, Western, Members United, Southwest and Constitution.

Last week, NCUA Board Member J. Mark McWatters reported that the agency was working on paying out capital accounts for as many of the failed corporates as possible.

The payouts will be the result of what the agency termed “better than expected recoveries through the NGN program” that have allowed the agency to pay capital claim holders of the corporates. The agency also noted that, when the NGN program was started, no payouts at all were predicted.

NCUA is also quick to point out that it is not yet ready to make distributions to all corporate capital account holders – and that not all account holders will receive payouts.

However, the agency is now ready to pay out to members of Southwest Corporate. According to the agency, the “asset management estate” (AME) holding the surviving assets of the former corporate has “sufficient fiduciary cash to conservatively provide for all future guaranty obligations and pay a meaningful amount of funds.” Those are two criteria, the agency noted, for making distributions.

According to NCUA, nearly 900 active credit unions will receive a payout from Southwest assets, totaling about 42% of the total $403.5 million of the membership capital held in the corporate.

The agency indicated payouts from three of the other four corporates could be next year, following a determination if a “distribution could safely and meaningfully be made.” Those distributions, however, may not be made at the same rate as that made for Southwest capital holders.

Notably, the agency’s presentation indicated that former members of Western Corporate (WesCorp) will likely receive no distributions.

The total payouts from the corporates, the agency estimated, will be about $2.5 billion.

NASCUS President and CEO Lucy Ito said the state system commends the agency for the “transparent and prudent manner” in which it is distributing funds to Southwest capital holders. “The agency was also very clear in describing the process it will undertake to determine additional future interim distributions,” she said.

NCUA Guaranteed Notes Program and Asset Management Estate Update

Agency retreats from July 6 ‘on-site operations’ plan

NCUA has decided to postpone its phased-in transition to “on-site operations” as a result of recent spikes of COVID-19 virus, agency board Chairman Hood said at the outset of Thursday’s agency board meeting.

Hood indicated that the transition’s plan postponement – which the agency announced late last week and was scheduled to begin July 6 – was made after conferring earlier this week with the agency’s public health consultant. He also emphasized that the transition plan will not be a “one size fits all” solution and that phases will be targeted for different locations across the country as warranted by public health trends within regions.

In the announcement last week, Hood told credit unions that the agency’s top priority is “ensuring the health, safety, and well-being of its staff while executing the agency’s mission.” He also said that the agency’s transition plan “has built-in flexibility if a later implementation date is necessary.” Hood indicated Thursday that recent events have required that flexibility to be exercised.

NASCUS’ Ito said the association and its member regulators and credit unions appreciate NCUA’s delay of phase one of its transition to on-site operations. She said the delay “gives NCUA and state supervisory agencies the opportunity to coordinate the resumption of on-site joint examinations of federally insured state-chartered credit unions.”

In other action, the board:

  • Approved a “request for information” to solicit comments on a virtual examination program for the agency, an effort, the agency said, designed to modernize the 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. NASCUS’ Ito said the state system looks forward to engaging in the request for information, 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).
  • Heard a briefing on the agency’s minority depository institutions (MDIs) annual report, which noted that 20 MDIs merged into other credit unions during 2019. Six of the continuing credit unions continued as MDIs. MDI mergers represented approximately 14% of all merger approvals, the agency said. All three board members expressed concern of the declining numbers of MDIs (which, at year-end 2019 totaled 514 in 36 states and territories). Hood said MDIs, and all credit unions, can play a role in addressing diversity, racial and equality challenges that have the subject of headlines in recent weeks. Board Member Todd Harper called MDIs a “critical part” of the credit union system. Board Member McWatters made several recommendations to bolster MDIs, including suggesting the agency play the role of matchmaker among struggling MDIs to create one (or more) larger institutions that could achieve economies of scale. (See “Briefly” item below on NCUA deadline for MDI mentoring grants)
  • Approved technical changes to NCUA rules, correcting “minor errors and inaccurate citations throughout the NCUA’s regulations,” according to staff.
  • Bid farewell to former NCUA Executive Director Marc Treichel, who is retiring from the agency at month’s end. NASCUS CEO Lucy Ito, echoing comments made by all three NCUA Board members at Thursday’s meeting, praised Treichel’s professionalism, leadership and collaboration with the state system during his tenure as top staff member at the agency.

Request for Information, Strategies for Future Examination and Supervision Utilizing Digital Technology.

Board Briefing, Minority Depository Institutions Annual Report.

Final Rule, Technical Amendments to NCUA’s Rules

Guidance urges flexibility in response to coronavirus

Guidance intended to promote consistency and flexibility in the supervision and examination of credit unions and other federally supervised financial institutions affected by the coronavirus crisis was issued this week by NCUA and federal banking regulators, and state credit union and banking regulators. The agencies noted, in releasing the guidance, that no action on the part of credit unions or banks is required.

According to the agencies, “stresses caused by the spread of COVID-19 have led to significant economic strain and adversely affected global financial markets.” The guidance, the agencies said, instructs examiners to consider the nature of the issues confronting the institutions they supervise due to the pandemic. The regulators urged examiners to “exercise appropriate flexibility in their supervisory response.”

Notably, joining the federal regulators in issuing the interagency examiner guidance were state financial regulators, represented by NASCUS and the Conference of State Bank Supervisors (CSBS).

The guidance notes that, in assessing an institution under the principles of the document, examiners will “consider the institution’s asset size, complexity, and risk profile, as well as the industry and business focus of its customers.”

The joint regulator document states that examiners will continue to assess institutions in accordance with existing agency policies and procedures and may provide supervisory feedback.

Or, the guidance states, agencies may “downgrade an institution’s composite or component ratings, when conditions have deteriorated.”

It states that, in conducting their supervisory assessment, examiners will consider whether institution management has managed risk appropriately, including taking appropriate actions in response to stresses caused by COVID-19 impacts.

Examiner Guidance Considering the Effect of the COVID-19 Pandemic on Institutions

Rules-a-palooza: CFPB issues regs on ‘underserved,’ forbearance …

The CFPB issued two rules this week, one interpretive and the other an interim final, on rules for determining which counties are “underserved” areas, and for judging when mortgage services can provide pandemic-related relief (based on limited info).

  • Determining ‘underserved’ counties

The bureau said the rule on determining underserved counties was necessary because of changes in data elements that were altered or removed in rules that became effective in 2018. The interpretive rule, the agency said, describes the Home Mortgage Disclosure Act (HMDA) data that will now be used for determining that an area is “underserved” for purposes of the standard described in Regulation Z, which implements the Truth in Lending Act (TILA). The bureau noted that Reg Z states that an area is “underserved” during a calendar year if, according to HMDA data for the preceding calendar year, it is a county in which no more than two creditors extended covered transactions secured by first liens on properties in the county five or more times. The agency said it previously interpreted how HMDA data would be used to determine which areas meet this standard using a method set forth in the commentary to Regulation Z. “However, portions of this method have become obsolete because they rely on data elements that were modified or eliminated by certain 2015 amendments to the Bureau’s HMDA regulations, which became effective in 2018,” CFPB said. The rule takes effect upon publication in the Federal Register.

  • Providing pandemic-related relief based on limited info

In the other regulation, and interim final rule, the agency gave the green light to mortgage servicers providing forbearance relief to homeowners facing hardship due to the coronavirus pandemic, and allowing this based on limited information collected from borrowers. CFPB noted that, with certain exceptions Regulation X (which implements the Real Estate Settlement Procedures Act, or RESPA) normally would require servicers to collect a complete loss mitigation application before making an offer. However, the bureau says its interim rule “makes it clear that servicers do not violate Regulation X by offering certain COVID-19-related loss mitigation options based on an evaluation of limited application information collected from the borrower.” The interim rule requires that the loss mitigation option meet certain criteria to qualify for an exception from the typical requirement to collect a complete application. The rule takes effect July 1.

Truth in Lending (Regulation Z); Determining “Underserved” Areas Using Home Mortgage Disclosure Act Data

Treatment of Certain COVID-19 Related Loss Mitigation Options Under the Real Estate Settlement Procedures Act (RESPA), Regulation X; Interim Final Rule

… and two proposed rules concerning the ‘GSE Patch’ …

Also this week, the bureau proposed two rules addressing the Jan. 10, 2021 expiration of the so-called “GSE Patch” – one establishing a “price-based approach,” and the other to extend the “patch” until a final rule on the first proposal is made effective – issued by the federal consumer financial protection agency Monday.

The two proposals were released as notices of proposed rulemakings (NPRMs). The agency said the pair of regulatory changes are intended to “ensure a smooth and orderly transition away from the temporary GSE QM loan definition and to maintain access to responsible, affordable mortgage credit upon its expiration.

The “GSE Patch” refers to a temporary qualified mortgage (QM) provision applicable under the bureau’s ability-to-repay/qualified mortgage (ATR/QM) rule to certain mortgage loans eligible for purchase or guarantee by the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.

The first NPRM would amend the general QM definition in Regulation Z to replace the debt-to-income (DTI) limit with what the agency called a “price-based approach.” The agency said it was proposing that approach because the agency preliminarily concluded “that a loan’s price, as measured by comparing a loan’s annual percentage rate to the average prime offer rate for a comparable transaction, is a strong indicator and more holistic and flexible measure of a consumer’s ability to repay than DTI alone.”

CFPB said that, for eligibility for QM status under the general QM definition, it is proposing a price threshold for most loans as well as higher price thresholds for smaller loans, which it said is “particularly important for manufactured housing and for minority consumers.” The agency said it also proposes that lenders take into account a consumer’s income, debt, and DTI ratio or residual income and verify the consumer’s income and debts.

The second NPRM would extend the GSE Patch to expire upon the effective date of a final rule regarding the first notice’s proposed amendments to the General QM loan definition in Regulation Z, CFPB said. “The Bureau is proposing to take this action to ensure that responsible, affordable credit remains available to consumers who may be affected if the GSE Patch expires before the amendments take effect as defined in the first NPRM,” according to a release.

Consumer Financial Protection Bureau Takes Steps to Address GSE Patch

… and sets up a ‘pilot advisory opinion program’

The CFPB last week said it is establishing a “pilot advisory opinion” program (which it refers to as “AO”) to review submissions from regulated entities, including credit unions, with questions about the applicability of bureau rules on their operations. The bureau said the pilot (which it intends to make permanent after reviewing comments on the program) would select topics submitted based on the program’s priorities and then make responses available to the public. The program is proposed as a procedural rule with a request for comment.

The agency said the program’s 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.

CFPB proposed procedural rule; proposed information collection; request for comment

More letters, alert mean more summaries for NASCUS members

It’s been another busy couple of weeks for the federal credit union regulator as it issued three letters to credit unions and a regulatory alert – which means it has been just as busy a period for NASCUS as it has summarized all of the agency issuances and has posted those summaries on the association’s website.

The letters and regulatory alert were all issued between June 9-19.

The NASCUS summaries address:

  • NCUA letter to credit unions (LTCU) 20-CU-18, issued June 9, which tackles earnings retention required for credit unions classified as adequately capitalized, and credit unions’ streamlined net worth restoration plans (NWRPs), under the auspices of regulatory relief. Regarding the earnings transfer relief, the letter states that an adequately capitalized credit union unable to meet the earnings retention requirement will not have to submit a written application requesting approval to decrease its earnings retention amount. Under the NWRP section, the letter states that for credit unions that see their net worth ratios decline, predominantly due to share growth, the agency will temporarily permit a streamlined NWRP to be submitted.
  • LTCU 20-CU-19, issued June 17, offers a list of 17 “frequently asked questions” about credit union service to legal hemp-related businesses, is intended to provide additional information to credit unions that are serving or considering serving legal hemp-related businesses – in particular, how they may now be able to provide the customary range of financial services for business accounts, including loans, to lawfully operating hemp-related businesses within their fields of membership.
  • LTCU 20-CU-20, sent to all federally insured credit unions June 19, looks at NCUA’s plans for a phased approach to resuming on-site operations. In particular, it notes that the agency will phase in on-site, voluntary examinations of credit unions; as noted above, that phase-in has been postponed, at least for now, due to recent spikes in COVID-19.
  • NCUA Regulatory Alert 20-RA-05, also issued June 17, provides an overview of final remittance rule changes adopted in May by the CFPB, and set to take effect July 21. Among other things, the alert notes that a credit union is not considered a remittance transfer provider if it provided 500 or fewer remittance transfers in the previous calendar year and provided 500 or fewer remittance transfers in the current calendar year.

The summaries are all available to members only.

LTCU 20-CU-18: PCA reg relief measures in response to COVID (members only)

LTCU 20-CU-19: Additional guidance on servicing hemp-related businesses (members only)

LTCU 20-CU-20: Phased approach to on-site operations(members only)

Reg Alert 20-RA-05: Remittance transfers (members only)

HMDA data for 2019 now available

Data on mortgage lending transactions in 2019 at more than 5,500 financial institutions – including credit unions — covered by federal mortgage lending disclosure requirements are now available, the FFIEC said this week. The exam council said the 2019 data for the Home Mortgage Disclosure Act (HMDA) includes data products such: as aggregate and disclosure reports, providing summary information on individual financial institutions and geographies; and the HMDA Data Browser, which allows users to create custom tables and download datasets that can be further analyzed.

The exam council also noted that in March it made available loan/application registers for each HMDA 2019 data filer, modified to protect borrower privacy.

FFIEC Announces Availability of 2019 Data on Mortgage Lending   

Still time to attend July 1 webinar on planning in uncertainty

There is still time to register for and attend the July 1 webinar on “planning in great uncertainty,” a one-hour event that gets underway at 2 p.m. that day. Presented by long-time credit union analysts and leaders C. Alan Peppers and John Lass, the July 1 webinar is “The Future Has Arrived Early: Are We Ready for It?”

John Lass is president of Lass Advisory Services LLC; C. Alan Peppers is founder of CAP Advisory Services. Lass is a former senior executive for strategy and business development at CUNA Mutual Group (CMG); Peppers served as a credit union CEO for four decades.

See the link below for more information, including registration, for both events.

Also don’t forget the July 15 webinar on service to hemp, cannabis businesses. The webinar features Deirdre O’Gorman as leader of the 60-minute program. Starting at 2 p.m. ET, it is planned to provide financial institutions with the latest updates on the cannabis and hemp industries. See the other link below for more information on registration and the full agenda.

Planning in Great Uncertainty

Cannabis and Hemp: A Changing Landscape

NASCUS provides strong representation at international session

NASCUS regulators (and staff) were at the table this week when the International Credit Union Regulators’ Network (ICURN) met to discuss key regulatory issues affecting credit unions around the nation. A NASCUS representative was also re- elected to serve on the group’s steering committee.

State credit union supervisors attending the virtual meeting this week were NASCUS Regulator Board Chairman John Kolhoff (TX), NASCUS Regulator Board Vice Chairman Rose Conner (NC) Katie Averill (IA) and Holly Chase (MA). Averill provided a presentation on “Regional Perspectives: How the Pandemic is Changing Supervision” while NCUA’s Tim Segerson presented on “Regulatory Forbearance and Flexibility”.

Participating on the NASCUS staff side were President and CEO Lucy Ito and Vice President of Communications Shelton Roulhac.

Meanwhile, NASCUS’ Ito was elected to another two-year term as a member of the organization’s steering committee (as was NCUA’s Segerson); Ito also sits on ICURN’s board of directors.

BRIEFLY: Stress tests results prompt limits for big banks; MDI mentoring application date deadline extended

Stress tests for the 33 largest banks in the nation were released Thursday by the Federal Reserve, indicating that the financial impact of the coronavirus crisis has been significant and forcing the central bank to suspend stock buybacks and impose limits on dividend payments by the banks. The Fed said it was taking the action to protect the financial system from risks presented by the persistent virus. The test results, according to the Fed, indicated that the large banks are in good shape now, but could face trouble if a worst-case scenario (such as a “W” shaped recovery) should develop … The application deadline for credit unions to seek MDI mentoring grants from NCUA has been moved back a month to July 31, the agency said earlier this week. Under the program, the agency will make grants of up to $25,000 to help small institutions establish mentoring programs with larger, low-income-designated credit unions to provide expertise and guidance in serving low-income and underserved populations … Due to the Independence Day holiday falling on a Saturday this year, and the holiday being observed on Friday (July 3), NASCUS Report will be published a day earlier (on Thursday, July 2) next week.

Federal Reserve Board releases results of stress tests for 2020 and additional sensitivity analyses conducted in light of the coronavirus event

NCUA Extends MDI Mentoring Grants Application Deadline to July 31

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