March 13, 2020 NASCUS Report

THIS WEEK: Comments due July 8 on sub debt proposal; NCUA Board meeting closed to public this month; CFPB offers initiatives on advisory opinions, whistleblowers; Panel calls for big changes in response to cyber threats; Iowa gives OK to CU purchase of bank assets; CORONAVIRUS RESPONSE: National state regulator meeting postponed … NASCUS at the ready … Bureau cancels advisory group confabs … web page offers COVID-19 resources … updated pandemic guidance provided … Financials urged to work with borrowers; BRIEFLY: FL regulator on job; FASB issues LIBOR transition guidance

Comments due July 8 on subordinated debt proposal

Comments are due July 8 on a proposed rule for subordinated debt at credit unions, a date set with an official notice published this week in the Federal Register to open the 120-day comment period on the NCUA proposal.

The 275-page proposal – one of the longest ever issued by NCUA – was approved unanimously by the agency board six weeks ago (Jan. 23). It would allow well-capitalized credit unions to count subordinated debt as capital for risk-based net worth purposes.

Key provisions of the proposal include:

  • Permission for low-income-designated credit unions (LICUs), complex credit unions, and new credit unions to issue subordinated debt for purposes of regulatory capital treatment.
  • A maximum maturity of 20 years to be imposed on debt issued (with a minimum maturity of 5 years), and a minimum denomination of $100,000. The agency noted the maturity limit helps to clarify that the financial instruments issued are debt – and not equity in the credit unions (which are solely owned by the members; credit unions do not issue stock).
  • Prohibitions on a credit union from being both an issuer and investor unless the credit union meets certain conditions related to mergers.

NCUA has said it adopted the relatively long 120-day comment period (rather than a more typical 90-day period) to account for the relatively complex nature and length of the proposal.

NASCUS strongly supports the four-month comment period. The association has also 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. NASCUS President and CEO Lucy Ito has noted that the risk-based capital rulemaking itself is intended to increase the capital buffer standing of a credit union before the share insurance fund, and that subordinated debt is consistent with that goal.

According to the agency, there are 2,628 LICUs (complex and non-complex) that are “currently eligible” for subordinated debt under the new rule (LICUs may already build regulatory capital from outside sources). The new rule would also open the door to as many as 285 additional non-LICU, “complex” credit unions (281 existing, “complex,” and an estimated four new credit unions) to be eligible to take advantage of the new rule. NCUA has said up to 2,409 non-complex (and non-LICU) credit unions would not be eligible to issue subordinated debt.

NASCUS will develop (and publish) a summary of the proposal, available to members only.

LINK:
NCUA proposed rule: Subordinated debt

No open meeting for NCUA Board this month

The NCUA Board has scheduled only a closed meeting next week for its monthly gathering, to consider supervisory and personnel matters; no open (public) meeting has been scheduled, according to the agency’s website. Typically, the board schedules a monthly open meeting, and considers (at the least) a board briefing on key topics within the industry. Also typically, the board only skips one month a year (usually August) for an open meeting. Not including August exemptions, the board has held an open meeting each month since April 2017, after cancelling its March meeting that year. That streak of 33 scheduled open meetings ends next week. By contrast, the FDIC Board has scheduled an open meeting next Tuesday – but no audience will be allowed, due to concerns about coronavirus. The meeting will be public, however: it will be streamed live, via the Internet (as are all open meetings of the bank deposit insurer’s board).

LINK:
NCUA Board agenda (closed meeting), March 19

Whistleblower, advisory opinion programs backed by CFPB

A new “advisory opinion program,” proposed legislation authorizing awards to whistleblowers who report violations of consumer protection law, and a revised “responsible business conduct bulletin” were all announced last week by the CFPB, part of an effort, the agency said to “advance its strategy on one of its key priorities: preventing consumer harm.”

Under the advisory opinion program, parties will submit requests for an advisory opinion to the bureau via its website. (The bureau will issue additional procedures for how requests will be addressed, including how requests will be prioritized.) CFPB said it will publish the responding advisory opinion in the Federal Register and on its website and will include an interpretation of existing rules. A current guidance process, in which responses to individual regulatory inquiries are generally available to the requestor, will remain available, “as will the bureau’s other efforts to provide clear guidance to the public,” the bureau said.

The proposed legislation, the agency said, would amend Title X of the Dodd-Frank Act to create an incentive for employees to report wrongdoing to the bureau, which the bureau asserted will assist it in advancing enforcement cases, especially as it relates to fair lending violations. “Under the proposed legislation, in cases where a whistleblower provides voluntary information that leads to a successful enforcement action, the bureau will be able to pay an award based on a percentage of the monetary sanctions collected in the action,” the agency said.

Finally, the CFPB said its responsible business conduct bulletin, originally published in June 2013, has been updated to clarify the bureau’s approach to responsible business conduct and emphasize the importance of such conduct. The bureau said the updated bulletin identifies four categories of responsible conduct: self-assessing, self-reporting, remediation, and cooperation. “If an entity meaningfully engages in these activities, the bureau will favorably consider it, along with other relevant factors, in addressing violations of federal consumer financial law in supervisory and enforcement matters,” the agency said.

LINK:
CFPB Takes Key Steps to Prevent Consumer Harm; Proposes Whistleblower Award Program, Other Measures

Bipartisan panel calls for beefing up cyber threat response

Significant changes in responses to cyber threats must be made by both government and the private sector in order to prevent systematic erosion of political, economic and security assets, a federally sponsored panel reported this week.

The Cyberspace Solarium Commission – co-chaired by both Democratic and Republican members of Congress – declared that the U.S. risks being hobbled by a large-scale cyber attack that could disrupt the functions of the nation’s essential and interconnected financial, energy, communication, and transportation sectors. In a 122-page report, the group called the status quo “unacceptable.”

“Our country is at risk, not only from a catastrophic cyberattack but from millions of daily intrusions disrupting everything from financial transactions to the inner workings of our electoral system,” commission co-chairs Sen. Angus King (I-Maine) and Rep. Mike Gallagher (R-Wis.) wrote.

In their report, the commission offered more than 75 recommendations for the government and private sector to beef up cybersecurity, including draft legislation for Congress to adopt quickly to speed up implementation.

LINK:
CSC final report

Iowa regulator lifts objection to CU bank assets purchase

The sale of an Iowa bank’s assets to a local credit union has been cleared by the state bank regulator, according to reports this week. The Iowa Division of Banking, under the settlement, would collect a six-figure sum from the selling bank to cover the agency’s costs of reviewing the transaction.

“In light of the extremely unique circumstances regarding this transaction and the Application, First American (Bank, of Fort Dodge) and the (Iowa Department of Banking, IDOB) Superintendent agree it is in the best interest of all involved—especially the First American customers impacted by the transaction who are confused regarding the status of their deposits and loans and who deserve a timely resolution of this matter—to settle this dispute,” the settlement said.

Green State Credit Union of Iowa City entered into a deal to purchase all of the assets and liabilities of First American; the bank plans to cease operations after the sale’s completed. Last week, however, according to the American Bankers Association (ABA), Iowa Superintendent of Banking Jeff Plagge initially denied the application, saying he was waiting until the close to a comment period on the sale before ruling on a final approval. The superintendent argued that the transaction did not meet criteria set under state law (in that a state bank seeking to sell off its assets to a non-bank – such as a credit union – needs to obtain state approval first).

The credit union late last week objected to delaying the sale; its attorneys wrote to the Iowa regulator saying the state agency had no authority in the matter and that the deal was closed.

In its settlement statement, according to reports, the IDOB stood by its position about approving bank sales to credit unions. The agency said “Iowa state-chartered banks seeking to voluntarily cease doing business as a bank and become a regular (nonbank) corporation must seek and obtain prior approval of the Superintendent before closing any sale of substantially all the bank’s assets and liabilities,” and that “the IDOB will quickly deny any future application based on a similarly structured transaction.”


CORONAVIRUS RESPONSE

National state regulator meeting postponed …

In the face of concerns over the spread of the coronavirus – as well as advisories from federal health agencies — NASCUS postponed its National Meeting for state regulators set for next week in New Orleans. An announcement about the date for the meeting will be issued later.

“This was a difficult decision since we know how valuable this meeting is for those who attend each year,” NASCUS’ Lucy Ito told registrants in an email. “However, given the current situation in New Orleans and around the country we determined this was the prudent decision – both for the personal health and safety of registrants and for the ongoing operations of their state agencies as we all face an evolving pandemic scenario. We’re aware that NCUA has already cancelled all NCUA training through April 24 and nonessential travel for staff, and that numerous state governments have made similar decisions.”

The two-day conference, open to state regulators only, is the annual gathering sponsored by NASCUS that brings the regulators together from across the country for two full days of taking a long look at the issues, topics and trends resonating through the state credit union regulatory environment today, with an eye toward the year ahead.

… NASCUS continues to monitor the outbreak …

Meanwhile, Ito said, the association continues to monitor the virus outbreak – and is fully capable of supporting the state system. “We are aware of the unique stresses and uncertainties this causes to state agencies, credit unions and the broader credit union system,” she said. “We have the infrastructure to enable remote work, and stand ready to assist the state system.”

… bureau cancels meetings of advisory groups …

Advisory group meetings for credit unions and other financial institutions set for this week were canceled by the CFPB, reportedly due to “travel restrictions.” The meetings – set to start Wednesday and run through Thursday — of the Credit Union Advisory Council (CUAC), Consumer Advisory Board (CAB), and the Community Bank Advisory Council (CBAC), and were scheduled to discuss broad policy matters related to the bureau’s unified regulatory agenda and general scope of authority. The Academic Research Council was scheduled to meet Friday; that meeting also is canceled. The meetings would have been the first of the year for the groups.

… state system offered COVID-19 resources …

Resources to help the state system navigate the coronavirus outbreak are listed on a new webpage on NASCUS’ website (nascus.org), including links to Centers for Disease Control (CDC) resources, the Department of Homeland Security’s (DHS) “risk management for novel coronavirus (COVID-19),” and FFIEC pandemic guidance (see below). “NASCUS continues to monitor Coronavirus developments through daily news reports and government agency communications,” NASCUS notes on the page. “We are engaged with Federal authorities and participating in ongoing communications pertaining to this issue. In addition, we are keeping all regular lines of communication open with our state regulatory agencies and will continue to provide relevant updates as they become available.”

LINK:
NASCUS COVID-19 Resources

… updated guidance provided on pandemics …

Updated guidance that financial institutions should follow to minimize potential adverse effects of a pandemic was issued late last week by the FFIEC, which advised that “regulated institutions should periodically review related risk management plans, including continuity plans, to ensure their ability to continue to deliver their products and services in a wide range of scenarios and with minimal disruption.”

The exam council guidance identifies actions financial institutions should take to minimize the potential adverse effects of a pandemic. Specifically, the council said, institutions’ business continuity plans (BCPs) should address pandemics and provide for a preventive program, a documented strategy scaled to the stages of a pandemic outbreak, a comprehensive framework to ensure the continuance of critical operations, a testing program, and an oversight program to ensure that the plan is reviewed and updated.

The pandemic segment of the BCP must be sufficiently flexible to address a wide range of possible effects that could result from a pandemic, and also be reflective of the institution’s size, complexity, and business activities,” the council stated.

The guidance also notes that – unlike natural disasters or malicious acts (such as a terrorist attack) – a pandemic’s effect is more difficult to determine because of the anticipated difference in scale and duration. “The nature of the global economy virtually ensures that the effects of a pandemic event will be widespread and threaten not just a limited geographical region or area, but potentially every continent,” the FFIEC noted.

LINK:
FFIEC Highlights Pandemic Preparedness Guidance

… FIs urged to work constructively with borrowers

Financial institutions should work constructively with borrowers and other customers in communities affected by coronavirus outbreaks, federal financial regulators and their state counterparts said in a joint statement this week.

The five federal financial regulatory agencies (NCUA, CFPB, FDIC, Federal Reserve, and the OCC — along with the Conference of State Bank Supervisors (CSBS)) — said in a release that their agencies “recognize the potential impact of the coronavirus on the customers, members, and operations of many financial institutions and will provide appropriate regulatory assistance to affected institutions subject to their supervision.”

In working “constructively with borrowers and other customers” in areas affected by the virus, the regulators said, prudent efforts consistent with safe and sound lending practices should not be subject to examiner criticism.

The agencies understand that many financial institutions may face current staffing and other challenges,” the joint statement asserted. “In cases in which operational challenges persist, regulators will expedite, as appropriate, any request to provide more convenient availability of services in affected communities.”

The statement also noted that regulators would also work with affected financial institutions in scheduling examinations or inspections to minimize disruption and burden.

LINK:
Agencies Encourage Financial Institutions to Meet Financial Needs of Customers and Members Affected by Coronavirus


BRIEFLY: New FL commissioner on job; FASB issues LIBOR transition guidance

Welcome to Russell Weigel who is now on the job as new commissioner for the Florida Office of Financial Regulation …. Easing the potential burden in accounting for reference rate reform is the aim of temporary optional guidance issued by FASB this week. The accounting standards update (ASU), the group said, provides stakeholders with guidance designed to “ease the process” of migrating away from reference rates such as the London Interbank Offered Rate (LIBOR), and others, to new reference rates. The guidance will be in effect through Dec. 31, 2022, FASB said, to help stakeholders during the reference-rate transition period.

LINK:
Accounting standards update (ASU) 2020-04—reference rate reform (topic 848): Facilitation of the effects of reference rate reform on financial reporting

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