Oct. 18, 2019 NASCUS Report

THIS WEEK: CECL delay to 2023 gets nod; Regulators propose credit loss policy; NCUA to consider non-member shares, FOM; Bonds, appraisals rules take effect; Thresholds ahead for Facebook’s ‘Libra;’ Bureau top aim is ‘preventing harm;’ ON THE ROAD: To the MAXX In WA; NASCUS 101 is here!

Delay of CECL standard to 2023
greenlighted by accounting board

The accounting industry’s standards-setting body has decided to delay the effective date for most credit unions and some others of its accounting standard on current expected credit losses (CECL) to January 2023, it was reported this week.

According to the reports, the Financial Accounting Standards Board (FASB) agreed to delay the standard during a meeting this week; a formal vote of the board must still be taken to complete the action. The delay would apply to small reporting companies (as defined by the SEC), non-SEC public companies (including credit unions) and private companies.

Currently, the effective date for the accounting standard – which aims to provide timelier financial reporting of credit losses on loans and other financial instruments held by financial institutions (including credit unions) and other organizations — is Dec. 15, 2021 for most credit unions (credit unions would not need to begin reporting data on call reports until the beginning of 2022).

In a statement released Thursday, NCUA Board Chairman Rodney Hood called the FASB decision “the prudent course,” adding that NCUA has announced plans to phase in the capital impact of the new standard, “which will provide relief to credit unions that could see large increases in their loan-loss reserves.”

Chairman Hood: CFPB Final HMDA Rule “Positive News for Credit Unions”

Agencies propose credit loss policy statement

At almost the same time as the FASB decision, a proposed interagency policy statement in response to the CECL accounting standard, and addressing allowance for credit losses (ACLs) at financial institutions, was issued this week by NCUA and the federal banking agencies.

In the joint proposal, the agencies describe the CECL methodology for determining ACLs at the institutions they supervise that are applicable to financial assets measured at amortized cost, including loans held-for-investment, net investments in leases, held-to-maturity (HTM) debt securities, and certain off-balance-sheet credit exposures.

The proposed policy statement – issued by NCUA with the Federal Reserve, the FDIC and the OCC — also includes and updates “concepts and practices” detailed in existing allowance for loan and lease losses (ALLLs) at their institutions that, the statement says, remain relevant under the new accounting standard.

“These concepts and practices relate to management’s responsibilities for the allowance estimation process, including the need to appropriately support and document the institution’s allowance estimates; the board of directors’ responsibilities for overseeing management’s processes; and the role of examiners in reviewing the appropriateness of an institution’s ACLs as part of their supervisory activities,” the proposal states.

The agencies want comment (due in 60 days after publication) on four areas of the proposed policy statement:

  • Does it clearly describe measurement of expected credit losses under the new CECL standard?
  • Is it clear about the measurement of credit losses on impaired available for sale (AFS) debt securities under the new standard?
  • Does it clearly communicate supervisory expectations for “for designing, documenting, and validating expected credit loss estimation processes, internal controls over ACLs, and maintaining appropriate ACLs?”
  • Does it “appropriately” include concepts and practices detailed in existing ALLL policy statements that are relevant under the new accounting standard?

The agencies also noted that the policy guidance will only take effect for financial institutions upon the effective date of the accounting standard for individual institutions. For example, for credit unions, the standard (with the new effective date about to be set by FASB) would take effect in 2023 (for fiscal years starting after Dec. 15, 2022).

Interagency Policy Statement on Allowances for Credit Losses

Non-member shares, FOM rules on board agenda

A final rule on non-member shares, and a rulemaking on credit union membership, are on the agenda for next week’s meeting of the NCUA Board.  The board will also hear a briefing about cybersecurity.

In May, the board proposed changing the basis for measuring the regulatory limit on non-member and “public unit” shares. Under the proposal, up to 50% of paid-in and unimpaired capital and surplus could be accepted by federal credit unions. The proposal also contains conforming amendments to NCUA rules affecting all federally insured credit unions (sec. 741.204) that reflect the proposed changes.

In addition, the proposal eliminated the current requirement that an FCU request a waiver from the agency’s regional office if it wants to exceed the limit. Instead, an FCU would be required to develop a specific use plan if its nonmember shares, combined with its borrowings, exceed 70% of paid-in and unimpaired capital and surplus. Examiners would also be charged with watching the level at which credit unions accepted the non-member shares (which also include the public unit shares, or funds provided by the federal government and its agencies, state governments and agencies, local public school systems, and more).

In its comment on the proposal, NASCUS wrote that public unit deposits can represent a stable source of external funding that can strengthen participating credit unions. “We are confident that NCUA and the states can supervise increased non-member shares public unit deposits in a safe and sound manner,” NASCUS stated.

However, NASCUS also pointed out that, in some cases, the 50% limit may not be enough. “While we concur that the proposed limit should be sufficiently high that the existing alternative measure of $3 million for smaller credit unions would be generally unnecessary, we remain concerned that for some credit unions, there could arise a need for levels of external funding in excess of the 50% limit,” NASCUS wrote. The association recommended a provision in the final rule for a credit union to seek a waiver from the limit, regardless of the credit union’s asset size.

In other action, the board is scheduled to issue a “public rulemaking” related to its membership rules. In August, a federal appeals court overturned a district court ruling from the previous year, which vacated two provisions of the agency’s chartering and field-of-membership (FOM) rule adopted in 2016 and in effect since February 2017. Those provisions qualified a “combined statistical area” with fewer than 2.5 million people as a “local community” that can be served by a credit union; the other raised to 1 million people the population limit for rural districts that may be served.

But in August, the U.S. Circuit Court of Appeals for the D.C. Circuit ruled that NCUA holds “vast discretion to define terms because Congress expressly has given it such power.” However, the court also stated that the authority is not boundless. “The agency must craft a reasonable definition consistent with the Act’s text and purposes,” the court stated.

Following that ruling, NCUA Board Chairman Rodney Hood indicated last month that the agency would take a “phased approach” in moving forward on its regulation, given that the court’s ruling remained subject to requests for further review. Hood also said “in the near future” the agency would consider a limited proposal to address the definition of local community. The federal court, in its decision, focused on the definition of “Core-Based Statistical Areas” that do not include the urban core.

The board meeting is scheduled to get underway Thursday at 10 a.m. at agency headquarters in Alexandria, Va.

Agenda: NCUA Board meeting, Oct. 24

NASCUS Comments on Public Unit and Nonmember Shares Proposed Rule

Fidelity bonds, real estate appraisals rules take effect

New rules on fidelity bonds and real estate appraisals are set to take effect next week (Tuesday), the result of action taken in July by the NCUA Board.

The real estate appraisals regulation (among other things) raises to $1 million (from $250,000) the threshold for commercial real estate transactions subject to required appraisals from state-certified appraisers. The board approved the final rule on a split vote of 2-1, with Board Member Todd Harper dissenting. 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.

NASCUS President and CEO Lucy Ito commended the board last summer, after adopting the final rule, saying credit unions and their members may realize effective regulatory relief as a result. “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,” she added.

The fidelity bonds regulation, according to the agency, strengthens a board of directors’ oversight of a federally insured credit union’s (FICU) fidelity bond coverage. It also, the agency said: ensures an adequate period to discover and file fidelity bond claims following an 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.

NASCUS has developed a summary of the fidelity bond final rules (available to members only) and filed a comment letter in December on the appraisals proposal. See the links below, along with links to the individual final rules.

NASCUS Final Rule Summary: Part 713 and Part 704 Fidelity Bond Coverage 

NASCUS Comment: Proposed Rule Part 722 Real Estate Appraisals

Final rule: Real Estate Appraisals

Final rule: Fidelity bonds

Proposed Facebook digi-currency has thresholds to clear

Global stablecoin networks – like Facebook’s proposed “Libra” digital currency — should be expected to meet a high threshold of legal and regulatory safeguards before launching operations, especially given the chances of possible illicit use, harm to consumers, and outdated regulatory frameworks, a member of the Federal Reserve Board said this week.

In remarks to the “The Future of Money in the Digital Age” conference of the Peterson Institute for International Economics and Princeton University’s Bendheim Center for Finance, in Washington, D.C., Gov. Lael Brainard outlined challenges for “stablecoins” such as Facebook’s proposed “Libra” digital currency. (She defined “stablecoins” as digital currencies that aim to maintain stable value by tying the digital currency to an asset or basket of assets, such as commercial bank deposits or government-issued bonds.) Brainard is the Fed board’s point person on payments systems.

The Fed governor said any stablecoin project (including Libra) must address a core set of legal and regulatory challenges before it can facilitate a first payment. She said:

  • Compliance with know-your-customer rules and regulations are essential to ensure stablecoins are not used for illegal activities and illicit finance;
  • Issuers of stablecoins designed to facilitate consumer payments must clearly demonstrate how consumer protections would be assured;
  • Defining the financial activities that the various players in the Libra ecosystem are conducting must be done in order for jurisdictions to assess whether existing regulatory and enforcement mechanisms are adequate.

In other comments, Brainard said that in addition to the Fed’s proposed “FedNow” Service (a Fed platform developed with the private sector for consumers and businesses to send and receive payments immediately and securely 24 hours a day, 7 days a week, 365 days a year), the Fed is exploring enhancements to same-day settlement of automated clearinghouse (ACH) transactions and expansion of Fedwire Funds Service and National Settlement System operating hours.

“We are working with the industry to improve the security of the payments system by, for example, increasing understanding of synthetic identity fraud and identifying a fraud classification approach to improve information sharing,” she added.

Gov. Lael Brainard: Digital Currencies, Stablecoins, and the Evolving Payments Landscape

‘Preventing harm to consumers’ top aim of bureau

Preventing harm to consumers is the top priority of the CFPB, its director told a House committee this week – which the agency does through education, providing “clear rules of the road” to regulated entities, enforcement and supervision to ensure compliance, and support of “dynamic and competitive markets that provide for consumer choice.”

In her semi-annual report to Congress – first to the House, the following day to the Senate – bureau Director Kathleen (“Kathy”) Kraninger touched on actions the agency took in the first half of fiscal year 2019 – and actions the agency will be taking in the second half. Many of those actions were outlined in the bureau’s written semi-annual report issued last week.

However, she focused on some key actions – including last week’s final revised rules regarding Home Mortgage Disclosure Act (HMDA) disclosures, required under last year’s regulatory relief legislation (the Economic Growth, Regulatory Relief and Consumer Protection Act, EGRRCPA, S.2155). She called those revisions “needed relief” for smaller lenders.

She also told the committee that, where the bureau cannot “prevent harm” to consumers, it uses its enforcement tools to hold bad actors accountable. “Every case is managed by bureau attorneys seeking justice in the public interest,” she said. She added that, in FY 2019, the bureau announced 22 public enforcement actions, and settled six previously filed lawsuits.

Prior to the hearing, House Financial Services Committee Chairwoman Maxine Waters (D-Calif.) released a report from Democrats on the committee (a “majority” report) outlining what the report said were actions by the bureau “undermining” the agency’s “previously robust policing of misconduct in the financial sector.” The committee Democrats recommended that the committee should find ways to strengthen the provisions in the Consumer Financial Protection Act of 2010 (CFPA), which they said authorize the agency to investigate potential violations of federal consumer financial law and seek relief for consumers through enforcement actions.

Written Testimony of Kathleen L. Kraninger, Director, Consumer Financial Protection Bureau Before the House Committee on Financial Services

House FSC Democrats’ report: Settling for Nothing: How Kraninger’s CFPB Leaves Consumers High and Dry

ON THE ROAD: Regulators (and more) gather in Spokane

NASCUS was on the scene this week with local state and federal regulators (and others) at the Northwest Credit Union Association’s (NWCUA) MAXX 2019 conference in Spokane, Wash. Regulators from Idaho, Oregon and Washington – joined by NCUA and NASCUS representatives – gathered for talks with credit unions and other state system players. At left, regulators taking some time to get together at the event are (from left): Janet Powell, manager of credit union program, Oregon Department of Consumer and Business Services, and NASCUS Regulator Board secretary/treasurer; Mary Hughes, acting director, Idaho Department of Finance; Amy Hunter, director of credit unions, Washington Department of Financial Institutions; Cherie Freed, NCUA western region director (whose region covers the three states plus 23 others and Guam); and Rick Sherrick, senior commissioned financial institutions examiner, Idaho Department of Finance. At right, Victor Corro, CEO of Coopera (a Des Moines, Iowa-based firm aimed at assisting credit unions in reaching and serving the Hispanic market) and NASCUS President and CEO Lucy Ito share some time after their joint presentation on credit union diversity, equity, and inclusion.

NASCUS 101 Orientation webinar is next week

NASCUS 101, a half-hour (no charge) webinar that brings together members, prospective members or anyone else interested in NASCUS to better understand the unique tools and benefits NASCUS offers, is NEXT WEEK (Thursday, Oct. 24). The event is packed-with-information about how NASCUS works, including: the unique leadership composition of NASCUS (through state regulators and credit unions); the association’s distinctive membership model that includes state regulatory agencies, credit unions, credit union leagues, and industry partners (associate members); legislative and regulatory priorities; training and education, committees, and our foundation (the National Institute of State Credit Union Examination or NISCUE). All may learn how to leverage their NASCUS membership. The webinar ends with a Q&A session. Advance registration required; sign up today!

Agenda, registration for Oct. 24 NASCUS 101 webinar (no charge)

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