Sept. 13, 2019 NASCUS Report

THIS WEEK: Hood — Subordinated debt proposal by year’s end; Ito: Talk to state regulators before rule on transactions; Harper: Keep the RBC rule effective date; Agency board to finalize three rules; Summary notes highlights of fidelity bond rule; Michigan charters first state CU since at least ’16; Report: vote this year in Senate Banking on cannabis banking – and more!

Proposed rules on subordinated debt,
bank acquisition transparency ahead for NCUA

Proposed rules on subordinated debt to be counted as regulatory capital for some credit unions, and another increasing transparency when credit unions acquire assets of banks, will be brought up for consideration before year’s end, NCUA Board Chairman Rodney Hood said this week.

“By the end of the year, I plan to bring before the board a proposed rule to allow subordinated debt to be counted as regulatory capital for a broader range of credit unions,” Hood said in remarks before a credit union trade group conference in Washington.

NASCUS 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. In June, NASCUS President Ito said “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.”

But it may not be easy: Last month, at the NASCUS State System Summit in San Francisco, a top NCUA legal staffer indicated that the subordinated debt proposal may have a tough road ahead. NCUA Deputy General Counsel Lara Daly-Sims told the conference that the agency is curious as to how much subordinated debt will be issued once the rule becomes final and that subordinated debt for credit unions will be a “heavy lift” in any event.

With regard to transparency in acquisitions by credit unions of small banks, Hood conceded that the number of transactions is “relatively small by any standard.” Nevertheless, Hood said, he plans for the agency to consider a rulemaking on the issue to add more transparency to the process.

“Right now, the NCUA must approve these transactions, as does the FDIC for these identical transactions,” Hood said. “Data suggest these are generally smaller institutions with lower profitability before the transactions occurred. If it makes it possible for a local financial institution to keep its doors open, then we must consider this factor.”

NASCUS has calculated that that, between 2012-19, there have been at least 31 transactions – with the vast majority (26) of acquisitions of banks by state credit unions. Among the states, 27 (out of the 45 that charter state credit unions) allow their credit unions to acquire banks.

In other comments, Hood said compliance with new accounting rules affecting current expected credit losses (CECL) can be phased in by the agency. He said the agency’s general counsel has determined that the board has authority to allow a phase-in of the requirements of the rule, which replaces the current allowance for loan and lease losses (ALLL) accounting standard.

“This will go a long way toward providing relief to credit unions that could see relatively large increases to their loan loss reserves when the new accounting standard becomes effective,” Hood said.

NCUA Chairman Rodney E. Hood Remarks – NAFCU Congressional Caucus

Ito: Safety, soundness, capital top concerns in transactions

Both state regulators and NCUA share an objective of assuring that the resulting entity from a credit union’s acquisition of a bank is safe, sound and adequately capitalized; however, the objective should not extend to governance questions that are the purview of state regulators, NASCUS President and CEO Lucy Ito told a trade publication this week.

In comments provided to Credit Union Journal, Ito said that if a rule on credit union/bank transactions is needed, NCUA should be talking with state regulators as it proceeds in the rulemaking process – particularly given state regulators’ recent experience (involved in two-thirds of the transactiions since 2012).

“Most state regulators come from ‘combined agencies’ that have supervisory authority over both credit unions and banks; hence, it is very common for state regulators to see both sides of a credit union-bank transaction—that is, from both the selling bank’s and from the acquiring credit union’s perspectives,” Ito said.

“If a rule is needed, we encourage NCUA to consult with NASCUS and state regulators to assure that the rule is properly constructed and to garner insights from state agencies that have evaluated a greater number and variety of these transactions,” she said.

She added that the state system looks forward to consulting with NCUA on whether a rule is needed.

Meanwhile: Harper focuses on RBC, consumer protection

While Chairman Hood was laying out future regulatory action for the agency, Board Member Todd Harper – in a separate speech — was urging a different path for the agency, particularly toward the risk-based capital rule and consumer protection.

Harper told a Washington group that “the right rules are in place to protect credit unions and their members, including implementing the NCUA’s long-delayed, risk-based capital standard at the start of 2019.”

“In my view, robust capital cushions are a key component of protecting against financial institutions’ failures and losses,” Harper said. He asserted that recent losses at federally insured credit unions concentrating heavily in taxi-medallion lending highlight need to implement swiftly, and not delay, the agency’s risk-based capital rule.

NCUA has proposed extending the effective date of the risk-based capital rule to 2022; the current effective date is 2019.

The NCUA Board member added that “after many years of work on a new risk-based capital regime, the Great Recession, and the recent taxi-medallion credit union failures, it is time for us to move ahead to protect the Share Insurance Fund before there is a problem, rather than assessing premiums after the fact as we did during the Great Recession.”

Harper also asserted that the credit union regulator’s enforcement of consumer protection laws at institutions with less than $10 billion in assets (those not regulated in that area by the CFPB) “is not comparable to our sister agencies.” He said federal banking agencies complete regular risk-focused consumer compliance exams and assign separate consumer compliance ratings outside of the CAMEL process.

Harper said he was raising the issue in the hope of starting “a constructive conversation within the credit union system about how the NCUA should evolve its consumer financial protection efforts.”

NCUA Board Member Todd M. Harper Remarks – Women in Housing and Finance Policy Lunch

Rule for supervisory committee audits on board agenda

A final rule dealing with supervisory committee audits is one of three final rules that will be considered for approval by the NCUA Board at its open meeting next week in Alexandria, Va.

The board meeting, which will also consider final rules changing certain aspects of Federal Credit Union Bylaws, and on a “payday alternative loan” rule (PALsII), gets underway at 10 a.m. ET.

In its proposal on supervisory committee audits (made in February), NCUA indicated it wanted to provide federally insured credit unions (FICUs) with greater flexibility in managing operations, which the state system supports, NASCUS stated in its comment letter earlier this year.

However, NASCUS also wrote that the association was not convinced that the agency should add specific subject areas such as loans to insiders, pay and benefits and compliance with Bank Secrecy Act (BSA) requirements to an appendix of its audit requirements. The association indicated that doing so would not produce enough supervisory value to justify the increased cost for credit unions.

“With respect to pay and benefits, it is unclear exactly what including those reviews in an audit would accomplish, although it should be noted that if the intent is to provide some transparency or review of executive compensation, FISCUs (federally insured, state-chartered credit unions) already file IRS Form 990 reporting such information,” NASCUS wrote. “There is no compelling reason to include FISCUs in a requirement for an audit of executive compensation.”

The other two proposals deal with an updated version of payday alternative loans (PALs II), and federal credit union (FCU) bylaws. Both apply only to FCUs – although NASCUS pointed out in a summary it issued on the PALsII proposal last year that “federally insured state-chartered credit unions (FISCUs) should look to state law and state regulation for their ability to make PALs loans.” As for the bylaws proposal, in a summary on that (also last year), NASCUS urged state credit unions to “to review their state bylaw requirements for FISCUs in light of NCUA’s initiative.”

NASCUS Summary: Proposed Rulemaking — Supervisory Committee Audits & Verifications (members only)

NASCUS Comments: Proposed Rulemaking, Proposed Rulemaking — Supervisory Committee Audits & Verifications

NASCUS Summary: NCUA Proposed Rule Payday Alternative Loans (members only)

NASCUS Summary: NCUA Proposed Changes to its Bylaws for Federal Credit Unions (FCUs) (members only)

Summary emphasizes key points of fidelity bond rule

A summary of NCUA’s new rule on fidelity bonds has been posted on the NASCUS website, the latest offering in the series of summaries of important rules, proposals and other issues related to NCUA and other key federal regulators for the state system. The summary is available to NASCUS members only.

The new rule, adopted by the NCUA Board in July and which takes effect Oct. 22, is intended to strengthen a board of directors’ oversight of a federally insured credit union’s (FICU) fidelity bond coverage, NCUA has said. 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.

The NASCUS summary focuses on key elements of the new rule and its impact on state-chartered credit unions, including that it now covers all FICUs, and not just federal credit unions.

NASCUS Final Rule Summary: Part 713 and Part 704 Fidelity Bond Coverage (741.201)

Michigan charters a new state credit union

Michigan celebrated the first state credit union chartered in at least three years this week as Department of Insurance and Financial Services Director Anita G. Fox signed the order issuing the charter for Superbia Credit Union, the first-ever formed to serve the national community of lesbian-gay-bisexual-transsexual-queer (LGBTQ) persons. The charter is the first issued by Michigan since 1986, and the first state-chartered CU since at least 2016 (in Texas). The credit union hopes to open its doors for business in early 2020. Pictured at the chartering-issuing ceremony are (from left): MI Sen. Jeremy Moss (D), Gov. Gretchen Whitmer (D), DIFS Director Fox, and Linda Bodie and Myles Meyers of Superbia CU.

CFPB announces ‘innovation network’ of state, federal regulators

A network designed to enhance coordination among federal and state regulators to facilitate financial innovation was announced Tuesday by the federal consumer financial protection agency, which said it had invited all state regulators to join. Called the American Consumer Financial Innovation Network (ACFIN), the initial members of the group are the attorneys general Alabama, Arizona, Georgia, Indiana, South Carolina, Tennessee, and Utah, the CFPB said in a release.

According to the bureau, the network “enhances shared objectives such as competition, consumer access, and financial inclusion.” The agency said it also is intended to promote “regulatory certainty for innovators” and will seek to “keep pace with market innovations and help ensure they are free from fraud, discrimination, and deceptive practices.”

The bureau said members of the group will share information to facilitate coordination among them, and “coordinate on innovation-related policies and programs.”

According to its charter (released Tuesday by CFPB), the new group has three objectives: Establish coordination among members to facilitate innovation that enhances competition, consumer access, or financial inclusion; minimize unnecessary regulatory burdens and bolster regulatory certainty for innovative consumer financial products and services; keep pace with the evolution of technology in markets for consumer financial products and services in order to help ensure those markets are free from fraud, discrimination, and deceptive practices.

Membership of the group is open to state attorneys general, state financial regulators and federal financial regulators, the bureau said.

CFPB and State Regulators Launch American Consumer Financial Innovation Network

Bureau director: new policies foster innovation, ease uncertainty

Three policies announced this week by the CFPB – on a Compliance Assistance Sandbox (or CAS policy); a revised trial disclosure program (TDP policy); and, a revised no-action letter (NAL) policy — are intended to improve how the CFPB exercises its authority to facilitate innovation and reduce regulatory uncertainty, the director of the agency told an Atlanta audience.

In remarks while opening a new agency regional office (the fourth located outside of D.C.), CFPB Director Kathleen Kraninger said the policies reflect the bureau’s additional mission of facilitating innovation and access to financial products and services for consumers.

On Tuesday, the CFPB announced three policies aimed at fostering innovation: a Compliance Assistance Sandbox (or CAS policy), aimed at enabling testing of a financial product or service where there is regulatory uncertainty; a revised trial disclosure program (TDP policy), in which entities seeking to improve consumer disclosures may conduct in-market testing of alternative disclosures for a limited time upon permission by the bureau; and, a revised no-action letter (NAL) policy that, the bureau said, provides, a more streamlined review process focusing on the consumer benefits and risks of the product or service in question.

An NAL under the new policy was also released Tuesday for the housing counselor agencies working with the House and Urban Development (HUD) Department that participate in the agency’s housing counseling program.

“These are the policies we are implementing to foster innovation,” Kraninger asserted. “As we apply these three policies, we will be looking at both the benefits of the innovation and also at whether they pose harm to consumers. This is fundamental to my priority for the prevention of harm to consumers.”

Kraninger said addressing innovation and regulatory uncertainty is more than high-tech products and smartphone apps, andding “it has the potential for broader application and greater beneficial impact.”

Director Kraninger’s Speech at Innovation Policies Launch Event

Full agenda of fall education events upcoming

Fall education opportunities from NASCUS are quickly approaching with as many as six events coming up beginning next week and continuing through the first week of December. Here’s the rundown:

Sept. 19: Colorado Executive Forum (Canvas CU, Lone Tree, Colo.): an annual session hosted by the Colorado Division of Financial Services, the Mountain West Credit Union Association and NASCUS; focus is on key credit union topics

Oct. 3: Ohio Directors’ College (State Library of Ohio, Columbus): Training provided to directors and officers by the credit union section of the Ohio Division of Financial Institutions (and hosted by NASCUS);

Oct. 22: Michigan Industry Day (Sheraton Ann Arbor hotel, Ann Arbor): An up-close look at the Michigan regulatory agenda and practices, as well as a close look at national issues.

Oct. 24: NASCUS 101 Member Orientation Webinar: 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.

Nov. 18-21: BSA Certification Conference (Tempe Mission Palms hotel, Tempe, Ariz.): Offered in partnership with the Credit Union Natl. Assn. (CUNA), the four-day event stands as the premiere event covering anti-money laundering/Bank Secrecy Act (AML/BSA) issues for the credit union system.

Dec. 3, Tennessee Directors’ College (Tennessee Tower, Nashville): Open to board and committee members, as well as credit union management, this one-day session offers a complete rundown of the state and federal regulatory and legislative issues confronting the local credit union scene.

For more information on these and other NASCUS education opportunities (including registration), see the NASCUS website

NASCUS upcoming education events/Fall ‘19

BRIEFLY: Report — vote this year in Senate Banking on cannabis banking; Senate confirms Bowman to 14-year term; NCUA names external affairs deputy

A Washington-based news organization reported Thursday that Senate Banking Committee Chairman Mike Crapo (R-Idaho)is open to a committee vote by year’s end on cannabis banking; no timeline was available. The panel chairman reportedly said he is compelled to act as cannabis businesses without bank access are forced to transact in cash, leading to security issues for other firms that do business with financial institutions … The Senate Thursday confirmed Michelle (“Miki”) Bowmanto a full 14-year term on the Federal Reserve Board on a vote of 60-31. Bowman – whose current, partial term expires in January – is the first designated community bank representative on the FRB. Her new term will expire in 2034 … Michael A. Sinacoreis the new deputy director for external affairs and communications for the NCUA, and is a former congressional staffer – most recently for Sen. Deb Fischer (R-Neb.). He has also worked on the House side for members of the Financial Services Committee.

Information contact: Patrick Keefe (

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