THIS WEEK: Insurance fund equity slips; MERIT exam system coming in 2021; Appraisal rule, BSA exemption OK’d; ‘Innovation’ department eyed; Report urges exam authority over CUSOs, 3rd parties; Rule extends AML standards to PICUs; Proposal gauges AML efficacy; Small biz data gathering outlined; States dominate bureau’s CU advisory group; TRANSITIONS: In NH, NM and MN; BRIEFLY: States agree to one exam for MSBs
Insurance fund equity slips to 1.22%;
Board discusses ‘vigilance’ for future
While no insurance premium for the federal credit union savings insurance fund has been assessed – and none is anticipated in the near future – the NCUA Board did devote extended discussion at Thursday’s meeting to that eventuality in the months ahead as economic uncertainty continues.
The board heard a report from staff that the National Credit Union Share Insurance Fund’s (NCUSIF) equity ratio, which gauges the level of total reserves in the fund to insured shares, had fallen to 1.22% at mid-year. That’s a 13bp drop from year-end 2019 (when the equity ratio stood at 1.35%) and represents the sharpest decline in recent years. Under the Federal Credit Union Act, if the equity ratio drops below 1.2%, the board must adopt a “restoration plan” to bring the equity ratio back up to the fund’s “normal operating level” (NOL) which is set by the NCUA Board. The NOL is currently set at 1.38%.
Part of Thursday’s discussion was prompted by the FDIC Board’s action this week, which voted to establish a restoration plan for that agency’s Bank Insurance Fund (BIF). As a result of a massive inflow of insured deposits by savers during the coronavirus crisis (in excess of $1 trillion during the first six months of the year) the BIF’s equity ratio dropped to 1.3%, well below the fund’s statutorily mandated level of 1.35%.
However, the FDIC board did not impose premiums (or “increased assessments” in agency parlance) to bring the fund back up to the required level in the eight years allowed under the law. Instead, the FDIC will over that time: monitor deposit balance trends, potential losses, and other factors that affect the reserve ratio; maintain the current schedule of assessment rates for insured banks and other institutions; and provide updates to its loss and income projections at least semiannually.
The NCUA Board members discussed the credit union fund’s options to meet a falling equity ratio, which was also spurred by a parallel massive inflow of savings related to economic stimulus payments and the Payroll Protection Program (PPP) as well as from credit union members seeking a safe harbor in the wake of the financial impact of the pandemic. Notably, deposits in both credit unions and banks grew by 13% in the first six months of 2020.
In response to questions from Board Chairman Rodney Hood, staff said no restoration plan was necessary for credit union insurance fund now. Staff also noted that credit unions will next month be adjusting their 1% deposits in the NCUSIF, reflecting their own recent growth and which should bring the equity ratio well above the statutory minimum of 1.2%. (Invoices to maintain the 1.0% capitalization deposit will be sent this week to a number of credit unions, NCUA said; the total will amount to $1.5 billion, with payment due in October.) Additionally, staff said, by year-end the equity ratio is projected to rise to 1.32%.
Nevertheless, Hood said “vigilance” is needed, and noted the FDIC’s restoration plan action. (In a statement following the meeting, Hood said the equity ratio during the first and second quarters of 2020 has seen a “significant drop from where it was as of Dec. 31, 2019. While we remain above the minimum equity ratio for the Share Insurance Fund, vigilance is needed to manage and monitor this situation.”)
While Board Member Todd Harper agreed with Hood’s view, he also said the credit union insurance fund is just a “thin hair’s width” away from the requirement for a restoration plan to be triggered. He called it a “black swan” situation – “something which we have not seen before, and something we could not have anticipated.”
Harper then repeated a call he made earlier in the week during an online meeting of a Washington credit union trade group that the NCUA Board must be prepared to charge a share insurance fund premium, should events warrant it, “and credit unions need to be aware of that reality,” he said. He acknowledged that levying a premium during an economic downturn is “less than optimal.” However, he pointed to increased delinquencies, bankruptcies, loan defaults and even credit union failures possibly ahead that could lead to credit union troubles.
He also repeated his view that NCUA should work with Congress after the current crisis to modify the share insurance fund’s operations, similar to how the FDIC operates. He asserted that FDIC has greater flexibility, an ability to charge risk-based premiums and other advantages.
Meanwhile, NCUA Board Member Mark McWatters said he was “apprehensive about a downward trend” in the equity ratio. He noted the timing mismatch between replenishment of the 1% deposit and share growth. “Regrettably, it is not alarmist to foresee the equity ratio dipping below 1.2% in 2021,” he said, with future statutory consequences including the possibility of premium assessments. He urged NCUA to work with all interested parties to address the issues to mitigate the need for the assessments and recommended that NCUA now begin considering the development of a restoration plan as the pandemic continues.
Hood, referring to the relatively short tenure left for both McWatters and Harper on the board (McWatters’ term ended last year, he is serving in a holdover status until his successor – Kyle Hauptman – is confirmed by the Senate; Harper’s term expires in April) said since he has a few more years left in his term on the board (which runs out in 2023) he “looks forward to addressing the issues that Board Members McWatters and Harper” addressed during the meeting.
NCUSIF Financial Statistics for the Quarter Ended June 30, 2020
MERIT exam system getting closer to rollout …
NCUA is targeting 2021 for the official rollout of its new, modernized examination program and will phase in applications by credit unions depending on their examination date, staff told the NCUA Board this week at its September meeting in Alexandria, Va.
The new Modern Examination and Risk Identification Tool (MERIT), part of the NCUA’s enterprise-wide systems update, will initially replace the agency’s current exam platform (the Automated Integrated Regulatory Examination System, or AIRES) and be used by credit unions to interact and share information with examiners, according to information on the agency’s website. The website explains that, through MERIT, credit unions will be able to securely exchange documents with examiners (including accessing exam reports) and will receive user notifications when it’s time to send or retrieve documents.
NCUA has also noted that the tool is built to be integrated into state supervisory authorities’ exams of state credit unions, and that the agency has worked with the state agencies as the project has proceeded.
“NASCUS appreciates the NCUA Board’s recognition of the need to work closely with state supervisory authorities in implementing MERIT,” said NASCUS President and CEO Lucy Ito. “The state credit union system looks forward to greater consultation and coordination during the extended pilot program to assure a smooth transition from AIRES to MERIT for state agencies, NCUA, all examiners, and state-chartered credit unions upon implementation.”
While the MERIT technological platform development has stayed on pace, training and implementation has necessarily lagged earlier projections due to the coronavirus crisis. A year ago, NCUA’s Hood forecast that the project would be rolled out to examiners and credit unions in 2020. Now, NCUA staff said that the system will begin to be rolled out to credit unions about a year from now with access being “phased in” depending on where a credit union falls on the overall examination calendar.
The project has not kept pace with earlier projections, however. A year ago, NCUA’s Hood forecast that the project would be rolled out to examiners and credit unions in 2020. The coronavirus crisis, however, likely played a role in slowing down progress. Now, NCUA staff said that the system will begin to be rolled out to credit unions about a year from now.
Also according to staff, credit unions will be introduced to the new system in advance of their next examination during 2021. For example, if the credit union’s exam is scheduled for November of 2021, that credit union will be introduced to MERIT in September. If a credit union’s exam was scheduled for earlier in 2021, however, the credit union won’t be introduced to the MERIT system until 2022.
… Board finalizes appraisal rule, OKs BSA exemption
In other action Thursday, the NCUA Board:
- Approved a final rule (issued last spring as in interim final rule (IFR)) on appraisals that defers the requirements for a credit union to obtain an appraisal or written estimate of market value for up to 120 days following the closing of a transaction for certain residential and commercial real estate transactions. The rule, according to NCUA, was issued to provide credit unions with regulatory relief to respond to the financial effect of the coronavirus pandemic. Similar rules were issued by federal banking agencies for banks. The final rule approved was identical to the IFR issued in April; NASCUS wrote in support of the rule in June. The rule is scheduled to sunset on Dec. 31. NCUA staff noted that they, together with other federal banking agencies, are monitoring the operating environment to determine whether the rule’s effective date may need to be extended beyond the end of this year.
- Gave the green light (from NCUA’s perspective) for staff to sign an order issued jointly by NCUA and the federal banking regulatory agencies granting an exemption from the Bank Secrecy Act’s (BSA) Customer Identification Program requirements for loans extended by credit unions (or banks) for purchases of property and casualty insurance policies as part of an anti-money laundering program. The order concludes that premium financing is not a useful or efficient means of laundering illicit funds or to provide terrorist financing. The action complements the exemption already provided by the Treasury’s Financial Crimes Enforcement Network (FinCEN) in relation to customer due diligence and beneficial owner rules.
NCUA leader desires new ‘innovation’ department
A focus on “innovation” – through the creation of a separate department – is on the radar for NCUA according to the chairman of the regulator’s board, which would place the agency in the ranks of other federal financial institution regulators that have likewise adopted the focus over the past three years or so.
For NCUA, Chairman Rodney Hood said, there will be a particular emphasis on financial technology firms (fintechs).
Hood said Tuesday he “would very much like to create an Office of Innovation and Access at NCUA” during an on-line session hosted by the National Association of Federally Insured Credit Unions (NAFCU) a credit union trade group. He indicated that the department would give the agency tools and the ability to “learn from industry practitioners” to help low-income consumers to (among other things) use credit data and receive smartphone-based financial education.
The NCUA leader asserted that even before the coronavirus crisis erupted that credit unions were already “partnering” with fintechs, and “I want to harness that and leverage it so it can be shared with even more folks,” he said.
Other federal financial institution regulators have shined a spotlight on innovation over the last three years. In particular, in October 2018 the Federal Deposit Insurance Corp. (FDIC) announced it was setting up an “Office of Innovation,” to be guided by a new Chief Innovation Officer (CINO) at the agency, who would also oversee a new tech lab (known as FDIC Technology Office, or FDITech). The purpose of the innovation office, according to the agency, is to partner with banks and non-banks to understand the effects of technology on the business of banking. To date, the agency has not named a CINO to head the office.
The FDIC followed the lead of two other regulators to set up innovation offices or programs. The OCC announced its “responsible innovation” initiative in the fall of 2017; the CFPB announced its innovation office in July 2018.
Report: NCUA should pursue 3rd party, CUSO exam authority
NCUA should continue to seek statutory authority for direct examination and enforcement authority over credit unions’ third-party vendors and service organizations, the agency’s inspector general wrote in an audit report made public by the agency recently.
The agency’s Office of Inspector General (OIG) said the Sept. 1 report, based on an audit of the agency’s authority over credit union service organizations (CUSOs) and vendors, was a “self-initiated” review. It notes that that the agency now complies with statutory, regulatory and policy considerations related to third-party vendor supervision. However, the report notes, that unlike federal banking regulators, NCUA lacks direct statutory authority over those vendors, just as it lacks direct authority over CUSOs.
The OIG said the agency should pursue statutory examination and enforcement authority over credit unions’ third-party vendors “to the same extent as if they were an insured credit union.”
The report acknowledges that the agency exercises some oversight (through regulation and supervision of credit unions) of third-party vendors. However, the OIG asserted that NCUA cannot enforce recommendations to vendors that might lead to credit union losses and losses to the National Credit Union Share Insurance Fund (NCUSIF). The audit, the OIG said, found that Between 2008 and 2015 nine CUSOs caused more than $300 million in direct losses to the NCUSIF and led to the failures of credit unions with more than $2 billion in aggregate assets. It said one of the CUSOs caused losses in 24 credit unions, some of which failed. It warned that lack of direct third-party vendor authority could allow a recurrence.
The report notes that, for a time, NCUA received temporary authority from Congress In March 1998 in anticipation of Y2K and participated in the FFIEC interagency supervisory program for technology service providers (from the early 2000s until about 2009). However, the report states, federal banking agencies eventually pushed back on that participation over concerns that vendors, because the NCUA had no statutory authority over them, would no longer allow the reviews at all.
A banking agency legal opinion later determined that the NCUA was not statutorily authorized “and could only participate in the program with written permission from the third party service provider under examination,” according to the OIG report.
NCUA has been asking Congress to reinstate authority over third-party vendors since its temporary authority to do so expired in 2001. The credit union industry has opposed the agency’s efforts.
NASCUS has supported the agency obtaining examination authority over technology service providers (TSPs) that provide services to federally insured credit unions, provided that any such authority requires NCUA to rely on state examinations of such service providers where such authority exists at the state level.
The association has also supported efforts to strengthen state regulatory examination and supervision of third parties providing services to state chartered credit institutions.
Rule imposes AML standards on privately insured CUs …
Institutions lacking a federal functional regulator – including non-federally insured credit unions and other institutions – will be subject to minimum standards for anti-money laundering programs established under a final rule issued this week.
The Treasury’s Financial Crimes Enforcement Network (FinCEN) said the final rule sets the minimum standards for anti-money laundering (AML) requirements for the non-federally supervised financial institutions to require them to establish and implement anti-money laundering programs. Those programs must include policies and procedures, a dedicated compliance officer, employee training and an independent audit function.
The privately insured credit unions (PICUs), state-chartered non-depository trust companies and private banks will also be subject to customer identification program requirements and beneficial ownership requirements.
According to FinCEN, the rule is meant to “ensure that all banks, regardless of whether they are subject to federal regulation and oversight, are required to establish and implement anti-money laundering programs, and extends customer identification program requirements and beneficial ownership requirements to those banks not already subject to these requirements.”
The final rule takes Nov. 15. The affected institutions will have 180 days to comply.
NASCUS understands that, even in the absence of a formal FinCEN rule, that states generally require credit unions and other non-federally supervised (or insured) institutions to have in place the same programs as their federally insured peers.
American Share Insurance, Inc. (ASI), the private insurance fund for credit unions, in a 2016 comment on the proposal that ultimately became the final rule, supported privately insured credit unions (PICUs) being held to the same standard as are federally regulated credit union, and supported the change envisioned in the proposal. NASCUS agreed with that view. Further, ASI President & CEO Dennis Adams stated, “ASI is confident that our member credit unions are already in full compliance with all fie pillars of FinCEN’s previously existing AML requirements, but with the new rule now in place, this should calm any outside parties from having concerns that privately insured credit unions are being held to lesser standards than other financial institutions.”
… while proposal would gauge AML effectiveness
An “effective and reasonably designed” anti-money laundering program must be maintained by all financial institutions subject to an anti-money laundering (AML) program, FinCEN said this week as it sought public comment on amendments to its rules.
The Treasury’s financial law enforcement agency indicated in an advance notice of proposed rulemaking that it is considering amendments to its AML rules about their design. FinCEN stated that the amendments under consideration “are intended to modernize the regulatory regime to address the evolving threats of illicit finance, and provide financial institutions with greater flexibility in the allocation of resources, resulting in the enhanced effectiveness and efficiency of anti-money laundering programs.”
Specifically, FinCEN said its proposed amendments would clarify that an “effective and reasonably designed” AML program would assess and manage risk according to the institution’s own risk assessment process; provide for compliance with BSA requirements; and provide for the reporting of information with a high degree of usefulness to government authorities.
The agency said its proposal would also create a mechanism to establish a set of national law enforcement priorities to help guide financial institutions with their risk assessments and resource allocation. FinCEN is also seeking input on whether to impose an explicit requirement for a risk assessment process and whether FinCEN’s director should issue a list of national AML priorities every two years.
Comments will be due 60 days after publication in the Federal Register.
Bureau outlines proposals on small biz data gathering
An outline of proposals under consideration for the collection of data on women-owned, minority-owned, and small businesses that could apply to credit unions and other depository institutions with assets of $600 million or less was issued this week for comment by the CFPB.
The outline explains proposals under consideration to implement section 1071 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) along with the relevant law, the regulatory process, and an economic analysis of the potential impacts of the proposals on directly affected small entities.
Since any potential rulemaking falls under the auspices of the Small Business Regulatory Enforcement Fairness Act (SBREFA), the CFPB said it will convene a SBREFA Small Business Advocacy Review panel on the measure in October. It said the panel will prepare a report on the potential rule’s impact on small businesses and that the bureau will consider that report and feedback from small businesses in its rulemaking.
Key points from the 79-page outline include:
- The bureau is considering proposing that covered products for this rulemaking include term loans, lines of credit, business credit cards. It is proposing that the section 1071 rule not apply to consumer-designated credit, leases, factoring, trade credit, and merchant cash advances.
- The bureau is considering proposals, in light of section 1071’s statutory purposes, to exempt financial institutions from any collection and reporting requirements based on either or both a size-based and/or activity-based threshold.
Written feedback from small entity representatives is due by Nov. 9 in order to be considered and incorporated into the SBREFA panel’s report, CFPB said; other stakeholders wanting to provide feedback are asked to do that no later than Dec. 14.
State reps dominate CUAC (with 2 from NASCUS CUs)
Continuing and new members of the CFPB’s Credit Union Advisory Council (CUAC) were announced this week, with five of the eight slots held by state-chartered credit union representatives (including the chairman), and two among those who are also leaders at NASCUS-member SCUs.
The bureau also named continuing and new members to its Consumer Advisory Board (CAB), Community Bank Advisory Council (CBAC), and Academic Research Council (ARC). All four of the bureau’s advisory groups are meeting via teleconference next week to discuss regulatory matters and the impact of the COVID-19 pandemic on consumers and financial markets.
Membership terms on all of the groups are two years and are staggered. Members of the CUAC are:
- Chair of the CUAC – Racardo McLaughlin, VP Mortgage Originations/Operations, TwinStar Credit Union (Lacey, WA; continuing as a council member from the last term).
- Brian Holst, General Counsel, Elevations Credit Union (Boulder, CO) (continuing, and a NASCUS-member credit union)
- Jeremiah Kossen, President & CEO, Town and Country Credit Union (Minot, ND, and a NASCUS-member credit union)
- Monica Davis, Senior Vice President Risk management, Union Square Credit Union (Wichita Falls, TX)
- Michelle Dwyer, President/CEO, Franklin First Federal Credit Union (Greenfield, MA)
- Rick Durante, VP, Director of Corporate Social Responsibility and Government Affairs, Franklin Mint Federal Credit Union (Chadds Ford, PA; continuing)
- Doe Gregersen, Vice President & General Counsel, Landmark Credit Union (New Berlin, WI; continuing)
- Jose Iregui, Vice President of Loan Servicing and Collections, Langley Federal Credit Union (Newport News, VA)
TRANSITIONS: Changes in NH, NM and MN
Gerald Little is returning full time as New Hampshire Banking Commissioner after being tapped by Gov.Chris Sununu (R) to serve as the first director of the new NH Governor’s Office of Emergency Relief and Recovery (GOFERR), where he was charged with standing up the office and designing and implementing major COVID-19-related funding. With mission completed, the governor said GOFERR is now housed in the state’s Business and Economic Affairs Department … Meanwhile, Rebecca Moore has been tapped as the acting director of the New Mexico Financial Institutions Division effective Sept. 5; she succeeds Director Chris Moya … finally, Grace Arnold, as of Sept. 11, is the temporary commissioner of the Minnesota Commerce Department, succeeding former Commissioner Steve Kelley.
BRIEFLY: States agree to one exam for MSBs
Money services businesses (MSBs) would be subject to a single exam by a joint group of state regulators, instead of being subject to individual state exams, under a new regulatory regime unveiled this week by the Conference of State-Bank Supervisors (CSBS). Under the CSBS agreement, reached by 48 state regulators, 78 large payment and cryptocurrency firms are affected by the new regime. Combined, the firms move over $1 trillion annually, according to CSBS. The plan aims to make it easier for companies to operate across multiple states, according to the regulators’ group.