Insurance, corporate funds to merge;
up to $800M distribution expected in ’18
The Temporary Corporate Credit Union Stabilization Fund (TCCUSF) will be closed and merged Oct. 1 with the National Credit Union Share Insurance Fund (NCUSIF), setting the stage for credit unions to receive “distributions” early next year of between $600 million and $800 million, following action Thursday by the NCUA Board. The board voted unanimously to merge the TCCUSF, set up in the aftermath of the financial crisis in the late 2000s, with the federal fund that insures savings at credit unions.
In making the decision, NCUA said that the actual amount of the distribution will be determined in March 2018, after year-end insured shares are reported. (The “distribution” is the amount that will be in the insurance fund that is more than that the agency determines it needs as the “normal operating level” of the fund.)
Although the estimated amount of distributions is $600 million to $800 million, the agency cautioned that actual results may vary due to: extraordinary losses and/or failures in credit unions; unusual or abnormally high insured share growth; economic conditions that involve greater volatility in one or more market indicators as compared to the stress scenarios modeled; extraordinary losses on the Legacy Assets resulting in higher than anticipated guaranty payments from NCUA. The agency said it will issue additional information regarding amount and accounting for any distribution in second quarter 2018.
Board Chairman J. Mark McWatters, and Board Member Rick Metsger, also pointed out that additional distributions may be made after 2018. According to a staff briefing, that amount could range from between $600 million and $1.1 billion, depending on economic and other factors.
Also, the board voted to raise the “normal operating level” of the fund to 1.39% of reserves to total insured shares, up from 1.30%. However, both McWatters and Metsger indicated that the agency would review the operating level on at least an annual basis between 2018 and 2021, “based on relevant data.”
NASCUS, in its comment letter to the board on the proposal, supported closing the stabilization fund and merging it into the insurance fund, as well as distributing the corporate fund’s surplus to credit unions. But NASCUS acknowledged that doing so has risks, including exposing the NCUSIF to the financial obligations of the corporate resolution program, and facing the risk associated with any economic downturn that impairs the value of the legacy assets, which in turn could trigger a decline in the NCUSIF’s equity ratio. NASCUS also noted that temporarily increasing the normal operating level for the duration of the corporate resolution is prudent, but cautioned that the 1.39% level not become “the new normal.” To achieve that, NASCUS recommended that NCUA provide clearer assurance that the 1.39% rate would sunset upon maturity of the NCUA Guaranteed Notes in 2021. “The agency’s commitment to review the operating level annually beginning in 2018 should address this concern,” said NASCUS President and CEO Lucy Ito.
Board action memorandum
BOARD MEMBERS STRONGLY DEFEND THEIR DECISION
Both members of the NCUA Board gave lengthy statements in support of their action, ultimately, to both approve closing and merging the TCCUSF with the insurance fund, and raise the “normal operating level” of the fund to 1.39%. The agency leaders called the actions both bi-partisan and in the interests of protecting the share insurance fund.
“While I recognize the importance of distributing surplus funds to insured credit unions, at the same time the NCUA must ensure the Share Insurance Fund has the resources to guard against reasonably foreseeable future adverse economic conditions. That is why a necessary component of the decision to close the Stabilization Fund calls for raising the normal operating level of the Insurance Fund,” NCUA Board Chairman McWatters said. “Accordingly, after careful analysis based on the current facts, I support raising, for the time being, the Share Insurance Fund’s normal operating level to 1.39 percent. I want to emphasize that the agency will continue to analyze the Insurance Fund’s risk exposure, and each subsequent year the NCUA Board will evaluate what the normal operating level needs to be based on the relevant data and trends as they evolve over time.”
(As noted previously, NASCUS had urged the agency to adopt a mechanism for reviewing the fund’s normal operating level, so that the 1.39% rate would sunset upon maturity of the NCUA Guaranteed Notes in 2021, and that the 1.39% rate not become not become “the new normal.”)
Board Member Metsger said that both NCUA and the credit union system should be proud of the work done together to rebuild and strengthen the system in the wake of what he called “the biggest challenge we ever faced.” “It is important to note that, at every step of the way, the NCUA Board has been steadfast and united; every action has been unanimous and bipartisan,” he said. Metsger also pointed to the issuance of NCUA Guaranteed Notes by the agency (which stood behind the “legacy assets” of the corporate credit unions) and legal recoveries as leading to the payment of dividends to credit unions next year. He said by issuing the NGNs, “we avoided a fire sale of toxic assets. By far the most important reason is the success of our lawsuits. Without those recoveries, instead of getting money back, credit unions would be paying more in.”
PROPOSAL GIVES INSURED CREDIT UNIONS
A MORE PRACTICAL APPROACH IN TV, RADIO ADS
In other action, the NCUA Board proposed new rules for advertising credit unions’ federal insurance coverage status, which are aimed at restoring a balance in regulatory burden for credit unions vis-à-vis that for banks by making credit union television and radio advertising more practical. The board issued a notice of proposed rulemaking for a 60-day comment period which recommends revising the agency’s rules requiring federally insured credit unions to use the agency’s “official advertisement statement” when advertising. More specifically, the proposal would allow the credit unions to use an additional, three-word option – aimed at TV and radio advertising — to the options already in force: “Insured by NCUA.”
The three options now in effect are: “This credit union is federally insured by the National Credit Union Administration” (the agency’s official advertising statement); the shorter version, “Federally insured by the NCUA;” and, as a third option, the official sign may be displayed in advertisements in lieu of the advertising statement. In adding the fourth option, NCUA said it is providing regulatory relief to credit unions, and is focusing on the exemptions relating to radio and TV advertisements that are less than 15 seconds in duration.
“For many years, NCUA’s advertising and official sign regulations were essentially the same as those of the Federal Deposit Insurance Corporation (FDIC),” agency staff told the board. In 2011, staff added, the Board amended its advertising rule making it “more stringent” than FDIC’s rules. “Specifically, in 2011, while banks needed only to include the FDIC advertising statement in radio and television ads that exceeded 30 seconds, the 2011 NCUA rule change required FICUs to include NCUA’s official advertising statement in radio and television ads that exceeded 15 seconds. “This additional requirement, which the Board now believes is unnecessary, affected more FICU ads and disrupted the balance between bank and FICU regulatory burden in this context,” staff added. “According to some FICUs, it also made it more difficult for FICUs to produce effective ads.”
In other action Thursday, the NCUA Board issued its 2018-22 strategic plan for a 60-day comment period. The plan, NCUA said, outlines three strategic goals for the agency:
- Ensure a Safe and Sound Credit Union System.
- Provide a regulatory framework that is transparent, efficient and improves consumer access.
- Maximize organizational performance to enable mission success.
LETTER OUTLINES UPDATED CECL FAQS;
ADVISES ‘TAKE STEPS IN ADVANCE’
A new summary (members only) of NCUA Letter to Credit unions 17-CU-05 posted by NASCUS looks at key points joint guidance issued on the new “current expected credit loss” accounting standard issued by FASB. The letter, sent earlier this month (and signed by NCUA Board Chairman J. Mark McWatters) advises credit unions to take steps in advance to ensure they can implement the new “current expected credit loss” (CECL) accounting standard, even though the new practice doesn’t take effect until Dec. 31, 2021. His letter, to all federally insured credit unions, accompanied a list of “frequently asked questions” (FAQs) developed with other federal financial institution regulators “to provide credit unions, examiner staff, and other stakeholders with a better understanding of the CECL requirements and associated supervisory expectations.”The FAQs updated an earlier list issued last December.
INDIANA’S FITE NAMED TO STATE PANEL OF EXAM COUNCIL
Tom Fite, director of the Indiana Department of Financial Institutions, has been named a member of the State Liaison Committee (SLC) of the Federal Financial Institutions Examination Council. The appointment fills out the committee’s membership roster – with four of the five having oversight of credit unions in their states.
Fite is a long-time regulator, serving in field examination and regional supervision roles for the Indiana department for 15 years. In 2013, he was appointed deputy director of the department’s Depository Division; he was named director of the department in 2016. Fite is completing the remainder of the two-year term left vacant by the early departure of Judi Stork; his term expires in 2019. He serves as the state regulatory agencies’ representative on the FFIEC Task Force on Supervision and on the Financial Crimes Enforcement Network’s Bank Secrecy Act Advisory Group. He served on the joint Interagency Supervisory Process Committee and was recently named Chairman of the CSBS Education Foundation.
The SLC consists of five representatives of state banking and credit union agencies that supervise financial institutions, designated by the FFIEC itself and various professional groups, including NASCUS.
The five-member SLC also includes:
- Mary Hughes, Financial Institutions Bureau Chief of the Idaho Department of Finance, appointed by NASCUS;
- SLC Chairman Greg Gonzales, Commissioner, Tennessee Department of Financial Institutions, appointed by the CSBS;
- Edward Joseph Face, Commissioner of Financial Institutions for the Virginia State Corporation Commission’s Bureau of Financial Institutions, confirmed by the Council; and
- Caroline Jones, Commissioner of the Texas Department of Savings and Mortgage Lending, appointed by the American Council of State Savings Supervisors (ACSSS).
“State regulators sitting on the SLC routinely provide their federal counterparts on the FFIEC with a ‘reality check’ of what is happening in local markets and state economies,” said NASCUS’ Lucy Ito. “Prior to Tom’s SLC appointment, I have seen him in action on FFIEC working groups and sub-committees, where he has represented with distinction the interests of both state banks and credit unions. He is an excellent addition to the liaison committee.”
DATA REVEAL HOW AMERICANS ARE RECOVERING FROM FINANCIAL CRISIS
Two surveys gauging how the American public is dealing with the aftermath of the financial crisis of the earlier years of the decade were released this week, with both encouraging and troubling results outlined. The Federal Reserve’s Survey of Consumer Finances for 2016 (a triennial report updated from 2013) showed broad-based income gains across many different types of families during the period 2013-16, with families lacking a high school diploma and nonwhite and Hispanic families experiencing larger proportional gains in incomes than other families. However, the report also showed that more-educated families and white non-Hispanic families continue to have higher incomes than other families. In addition, the Fed survey reported that families at the top of the income distribution saw larger gains in income between 2013 and 2016 than other families, consistent with widening income inequality. (Separately this week, Fed Gov. Lael Brainerd delivered speeches focusing on income disparity, noting that disparities in labor and wealth have implications for the growth capacity of the economy.)
Also this week, the CFPB released the results of what it called the first-of-its-kind “Financial Well-Being” survey, which found that millions of American adults – more than two in every five – struggle to make ends meet, and more than one-third of all consumers reported experiencing material hardships in the past year. The survey provided measurements and insights on the financial well-being of specific groups of consumers as well as the population as a whole, showing that 43% of consumers report struggling to pay bills, CFPB stated. Regarding “material hardships,” the results showed 34% reported running out of food, not being able to afford a place to live, or lacking the money to seek medical treatment. Those areas were all examples of material hardships.
ICYMI: WHAT WE DID IN SEPTEMBER
Here’s a quick run-down of what NASCUS did for the state system in September 2017:
- Submitted four comment letters: We filed letters with NCUA on the crucial issues facing the credit union system at large, ensuring the state voice was heard on the closing and merger of the corporate stabilization fund, share insurance fund equity distribution, revisions to the corporate credit union rule and (at the very end of August), the overhead transfer rate (OTR). More comment letters are in the works – particularly on NCUA’s call in August for comments on its regulatory reform agenda, due in November.
- Developed summaries and quick references: We posted a summary of an NCUA letter to credit unions, and created quick summaries to guidance, rules and other communications issued by the CFPB, including on changes to the bureau’s Equal Credit Opportunity Act (ECOA, Regulation B) final rule, the Home Mortgage Disclosure (Regulation C) amendments final rule, and proposed policy guidance; Disclosure of Loan-Level HMDA Data.
- Announced our new leadership for 2017-18: We announced results of elections to the board and credit union advisory council, providing more exposure to the credit union system at large of NASCUS and the people who guide it.
- Hosted key educational events: We hosted a directors’ college in Denver, continuing our tradition of bringing credit union directors — along with senior credit union staff — together with state regulators to can hear first-hand their expectations of credit union directors, and the issues that directors will confront,
- NASCUS Comments: OTR Methodology
- NASCUS Comments on Stabilization Fund Closure
- NASCUS Comments on Requirements for Insurance: National Credit Union Share Insurance Fund Equity Distributions
- NASCUS Comments on Corporate Credit Unions
Summary, quick reference:
- Summary — LTCU 17-CU-05: Joint Statement – Frequently Asked Questions on the New Accounting Standard on Financial Instruments – Credit Losses (members only)
- Quick reference: Proposed policy guidance; Disclosure of Loan-Level HMDA Data
- Quick reference: Equal Credit Opportunity Act (ECOA, Regulation B) final rule
- Quick reference: Home Mortgage Disclosure (Regulation C) amendments.
BRIEFLY: CU tax exemption safe for now; welcome back
The credit union tax exemption is apparently unaffected in President Donald Trump’s tax reform proposal, unveiled this week; no change is recommended. However, the credit union trade groups are advising vigilance as the tax reform process begins to ramp up in Congress … Welcome back to the Virginia Credit Union League and the Credit Union National Association (CUNA) as associate members of NASCUS.
Patrick Keefe, email@example.com