Letter supports OTR changes, offers refinements
Noting that NCUA’s proposal to overhaul the methodology of the National Credit Union Share Insurance Fund (NCUSIF) “overhead transfer rate” is a marked improvement over the flawed current methodology, NASCUS told the agency that the association supports the changes, and offered some views to refine and improve the effort.
In its letter responding to the NCUA Board’s request for comments on the OTR (the rate at which NCUA transfers money from the insurance fund to cover its “insurance-related expenses”), NASCUS President and CEO Lucy Ito commended the agency for publishing a revised OTR methodology for formal notice and comment.
“NASCUS and its members have long held concerns regarding the OTR methodology and NCUA’s management of its complex role as both the chartering authority of federal credit unions (FCUs) and as the administrator of the National Credit Union Share Insurance Fund (NCUSIF),” Ito wrote. She noted that NCUA took a “major step forward” in establishing an equitable and workable methodology by acknowledging that the agency has safety and soundness responsibilities for FCUs in its role as the prudential regulator, in addition to its role as a deposit insurer.
“That recognition is also central to the shift to a ‘principles-based’ approach that allocates the NCUA’s examination time and costs evenly between its chartering and insurance-related responsibilities,” Ito wrote. “The adoption of a principles-based approach will help reduce the complexity of the OTR methodology and the 50 percent rule makes intuitive sense because it is modeled after and reflects the likely allocation using alternating examination schedules.”
However, the NASCUS letter made several recommendations for refining the proposal, as well as requests for some clarifications. Those include:
- Recommendation that NCUA allocate 25% of its CUSO and third-party workload hours to its “Title I” responsibilities (that is, as the chartering authority for federal credit unions).
- Clarifications about how changes to the agency’s Office of Consumer Financial Protection and Access and the creation of the Office of Credit Union Resources and Expansion would affect the proposed methodology.
- Recommendation that NCUA use a 50% allocation for its human resources and board functions. “We are willing to accept the 60% allocation for the other program offices as a compromise designed to balance the OTR,” NASCUS wrote. “NCUA should revisit these initial allocations in the future.”
- Recommendation that public comment on the OTR be sought at least every three years, whenever the methodology is changed, and any time the OTR changes by more than 2% (up or down) in any given year.
“The proposed revisions to the methodology evidence a commitment within NCUA to develop an equitable and understandable basis for allocating the combined expenses of the agency’s dual mission,” Ito wrote. “NASCUS, state regulators, and the state credit union system remain committed as well to forging a balanced partnership with NCUA that contributes to a vibrant credit union system into the future.”
ADDITIONAL VIEWS ON OTR PROPOSAL BACK STATE SYSTEM’S
State regulators, leagues and credit unions and national credit union trade groups joined also commented on the OTR proposal, with the overwhelming majority of the letters in concert with NASCUS’ position that the new methodology proposed, which recognizes NCUA’s role in safety and soundness as chartering authority, was the proper change to make.
In fact, combined with the 40 letters filed last year unanimously calling for changes in the OTR, the 19 letters in support this summer constitute strong support for the state credit union system view, said NASCUS’ Ito.
Supervisors from Idaho, Illinois, Michigan, North Dakota, Texas and Wisconsin added their voices to the discussion, pointing to the key issues at stake in the proposal. “The OTR methodology is a matter of significant concern to the Department as a misapplication may disadvantage federally insured state-chartered credit unions in real ways,” wrote Mary Hughes, acting director of finance for the Idaho Department of Finance. “We believe that the current proposed revisions to the OTR methodology advance our agencies toward an equitable balance in the cost allocations of the National Credit Union Share Insurance Fund,” sentiments echoed in other regulators’ letters.
Another key sentiment echoed in the regulators’ letters focused on their agencies’ responsibilities to ensure that the credit unions they supervise are operated in safe and sound manners, and that NCUA – as the chartering authority for federal credit unions – is similarly obliged to do so for the credit unions that it supervises. The regulators noted, in various ways, their various commitments to that responsibility: Idaho, North Dakota, Texas and Wisconsin pointed out that they have budgeted for more than 52,000 hours of credit unions examinations between them for 2017. Michigan noted that it had budgeted about 83,000 supervisory-related hours in 2016 (with 33,000 of them for on-site exams). Illinois reported that this year it will perform 153 full examinations, and 23 follow ups.
The largest national credit union trade group, the Credit Union National Association (CUNA), and state credit union leagues, expressed support for the proposal (particularly about the effort toward transparency), but also suggested additional changes. A common theme among the groups was that the agency should take another look at the expense allocations proposed, and that public comments on the methodology should be sought on a regular basis, or that the OTR be considered under the regular rulemaking process of the agency. Additionally, some commenters (such as the Wisconsin Credit Union League) advocated that the NCUA budget should be funded 50/50 from the OTR and from FCU operating fees, “as it was for many years.”
State-chartered credit unions largely supported the proposal, but also suggested some changes (such as refining the expense allocations, and seeking public comment).
The other national credit union trade group, the National Association of Federally-insured Credit Unions (NAFCU), and federal credit unions commenting individually, mostly opposed the proposal (while lauding NCUA’s transparency), expressing support for the current system, and concern about the impact of the operating fees federal credit unions pay to the agency.
COMMENTS BACK CLOSING TCCUSF, DISTRIBUTING FUNDS
NASCUS supports closing the fund established to stabilize the corporate credit union system and merging it into the federal share insurance fund, but acknowledges that doing so doesn’t come without risks, the association wrote in a comment letter to NCUA this week.
NCUA has proposed closing the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) by Oct. 1. Doing so, as NASCUS wrote, would fund a distribution of funds back to federally insured credit unions (FICUs) of approximately $600 million to $800 million. The action would also raise the fund’s equity ratio above the current normal operating level of 1.33% to a proposed 1.39%, NASCUS pointed out.
NASCUS acknowledged that closing the TCCUSF and distributing its surplus exposes the NCUSIF to the financial obligations of the corporate resolution program, including 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.
“While the integrity of the NCUSIF and its administration are NCUA’s responsibility, the burden and the cost of the risk of merging the two funds is ultimately borne by FICUs,” NASCUS wrote. “Despite this financial risk, many of the state chartered credit union stakeholders with which we have discussed this issue are in favor of merging the funds and initiating distribution of the TCCUSF surplus back to FICUs. We believe that state chartered credit unions understand the risk of merging the two funds this year and initiating distribution of the current surplus in 2018.”
NCUA also sought comments regarding the “normal operating level” of the fund (that is, the amount of equity in the insurance fund relative to insured shares). NCUA has proposed an operating level of 1.39% (the current level is 1.33%). NASCUS noted that the credit union system would be “uneasy” with the higher level, pointing out that “nothing in the proposal guarantees that an operating level of 1.39% for the NCUSIF will not become the new normal.” To address that, the NASCUS letter recommended the agency consider a mechanism that guarantees any increase in the insurance fund’s normal operating level as a hedge against a recession, which would sunset automatically when the corporate resolution concludes.
Additionally, the NASCUS letter noted the association had no objections to NCUA considering a new policy and revised formula to inform the normal operating level of the NCUSIF. “The Federal Credit Union Act (FCUA) accords NCUA considerable flexibility to establish the normal operating level between statutorily defined parameters of 1.2-1.5%,” NASCUS wrote.
MORE COMMENTS: INSURANCE FUND EQUITY DISTRIBUTION, CORPORATE CUS
This first week of September was certain “commentable” as NASCUS filed two more comment letters (in addition to those on the OTR and the TCCUSF) – on the fund equity of the share insurance fund, and on corporate credit union rules.
- NCUSIF equity distribution: NASCUS agreed with NCUA’s proposal to use a credit union’s average insured shares based on the previous four quarter’s call reports to determine proportionate shares of the distribution as a better distribution methodology. However, NASCUS disagreed with a proposed policy change prohibiting a federally insured credit union that terminates federal share insurance coverage during a calendar year from receiving an NCUSIF equity distribution for that calendar year. “For those credit unions, and their members, honoring the longstanding commitment to return their pro-rata share of a distribution is the right thing to do,” NASCUS wrote. Finally, regarding distributions resulting from TCCUSF recoveries, NASCUS supported “last in, first out” (LIFO) as preferable and more manageable.
- Corporates: NASCUS supports the changes as proposed by the agency, but also suggested additional revisions to current rules, to acknowledge dual chartering in the credit union system. NASCUS proposed that NCUA: form a task force with state regulators to review future adjustments to the corporate credit union rules; reintroduce meaningful dual chartering by eliminating unnecessary preemption of state rules, particularly with respect to corporate credit union governance, and; and enhance the joint supervision of corporates and their risk to natural person credit unions by formalizing increased information sharing between NCUA and the state regulators supervising the corporate credit union’s natural person credit union members.
NASCUS comments: Requirements for Insurance; National Credit Union Share Insurance Fund Equity Distributions
NASCUS comments: Corporate credit unions
STATES INCH CLOSER TO HOLDING 50% OF ALL CU ASSETS
State-chartered credit unions now hold just under 50% of all credit union assets – with more than $668 billion — based on mid-year numbers released from NCUA Wednesday and compiled by NASCUS. NCUA released the statistics as part of its detailing of second-quarter 2017 call report information. The NASCUS compilation includes both the financial information reported to NCUA from federally insured, state chartered credit unions (FISCUs) and to American Share Insurance, Inc. (ASI) by state-chartered, privately insured credit unions (PICUs).
“With state charters now holding 49% of all credit union assets, the vibrancy of the dual-chartering system is more evident than ever,” said NASCUS President and CEO Lucy Ito. “Credit unions have a choice in the charter that they offer to their members, to best serve their members’ needs. Clearly, credit unions are making the most of the choice.” States hold 49.6% of all loans, 49.4% of all deposits and 47.6% of all members at mid-year, the figures compiled by NASCUS show.
Although by numbers, FCUs remain dominant in the credit union space (with 62% of the nation’s 5,814 credit unions), state charters continue to grow slightly faster, expanding their assets by 4.5% in the first six months of the year, compared to FCU growth of 4.2%. Shares/deposits at states and federals are growing at the same clip (4.6% and 4.7%, respectively), but loans were up a shade at states versus federals (5% growth and 4.7%, respectively). FCUs advance slightly faster in memberships, growing by 2.3% compared to states at 2.1%.
Overall, credit unions (all states and federals) hold $1.37 trillion in assets, count 110.6 million members, $923 billion in loans and $1.16 trillion in deposits at mid year. The numbers of both federal and state chartered credit unions declined in the first half of the year, by 40 for FCUs and 49 for SCUs.
PROPOSED REG REFORM AGENDA COMMENT REQUEST SUMMARIZED
An extended review of NCUA’s regulatory reform agenda “request for comments” reveals the agency is looking for comments about reform in the short term (first two years of a four-year project, and categorized as the “most important”), the medium term (third year of the project) and long-term (fourth year of the project), according to a new summary posted by NASCUS.
“On February 24 of this year, President Trump issued Executive Order 13777, Enforcing the Regulatory Reform Agenda, to direct federal agencies to review their regulations to determine which regulations may be repealed, replaced, or modified,” the NASCUS summary states in its preamble. “While the executive order does not apply to NCUA, the Agency has chosen to adhere to its spirit and undertake a review of all rules and regulations. NCUA has published a recommended regulatory reform agenda that groups its existing rules into three Tiers for revision over the course of four years.”
In each of the three tiers, the NASCUS summary notes the actions that NCUA proposes to take over the next four years to clarify, remove, expand authority, improve or expand relief (in the short- and long-terms). The summary also notes that NCUA is proposing suspending its annual review of one-third of its regulations (which NCUA has been doing since 1987, on a voluntary basis). “The NCUA Task Force recommended renewing the annual review in 2020 (after the 4-year review and reform being conducted under the proposed Regulatory Reform Agenda),” the summary notes.
Comments are due Nov. 20 on the proposed agenda.
AGENCIES ISSUE STATEMENTS ON HURRICANE IRMA; ALLOWING CLOSINGS, URGE PRECAUTIONS
Federal financial institution regulators were gearing up this week for the approach of Hurricane Irma, likely to strike Florida and parts of the East Coast as soon as this weekend. NCUA advised credit unions in the path of the storm to take precautions as Irma bears down. The agency stated in a release that it is tracking the tempest closely, and will monitor the conditions of credit unions in the storm’s path. “The agency will be ready to assist credit unions with maintaining or restoring operations, if necessary,” NCUA stated. NCUA also noted that it maintains a hurricane and disaster information page on its website with more material on preparedness and staying safe.
Meanwhile, the OCC issued a proclamation Wednesday allowing national banks and federal savings associations affected by Hurricane Irma to close. OCC said that it expects only those bank offices directly affected by the extreme weather will close, and that those offices should make every effort to reopen as quickly as possible to address the banking needs of their customers.
COMPTROLLER, FED SUPERVISION LEADER RECOMMENDED FOR CONFIRMATION
Nominations for Comptroller of the Currency and Federal Reserve vice chairman for supervision were recommended for confirmation to the full Senate Thursday by the Senate Banking Committee on split votes. The committee recommended, 13-10, that Joseph Otting be confirmed as comptroller; one Democrat, Sen. Heidi Heitkamp (N.D.) joined all Republicans in voting for the recommendation. The vote for Randal Quarles to be Fed supervision vice chairman was 17-6, with several Democrats joining all Republicans. No date has been set for full Senate consideration of the nominations. Otting, if confirmed, would replace Acting Comptroller Keith Noreika, who has been in office since May. Quarles would be the first to fill the post of supervision vice chairman if confirmed.
HOUSE ACTION PENDING ON NCUA BUDGET PROVISION
An amendment to keep the NCUA budget out of the congressional appropriations process may come up for consideration on the House floor next week while the House prepares to vote on spending bills. In July, the House Appropriations Committee approved a spending bill (the “financial services and general government” appropriations package) that includes language subjecting the NCUA budget to the appropriations process (the budget is currently outside of direct congressional approval). The appropriations bill provision, if it becomes law, would mark the first time the federal credit union regulator, as an independent regulator, would face congressional budget approval. (NCUA Chairman J. Mark McWatters sent a letter to Appropriations Committee leaders, dated Aug. 9, “to express the agency’s concerns” about the provision in the bill, which McWatters asserted would “remove the NCUA Board’s authority to determine, with input from stakeholders, its annual operating budget.”) According to CUNA, the Appropriations Committee Wednesday night approved an amendment by Reps. Mark Amodei (R-Nev.) and Pete Aguilar (D-Calif.) to strike the language moving the NCUA under the appropriations process. Debate began Thursday night.
AT SUCCESSFUL SUMMIT, NEW LEADERSHIP EMPANELED, APPRECIATION EXPRESSED
If you attended last week’s NASCUS State System Summit in San Diego, you heard the common comment: “best meeting of the year” over and over. With more than 22 hours of presentation and discussion, and a program designed for the state system that allows it to absorb the latest in trends and key issues with an emphasis on the future, the conference clearly met the mark among participants.
Also at the Summit: Continuing and new leadership was empaneled for the association. Re-elected to the NASCUS Board were Rose Conner, Administrator, North Carolina Credit Union Division; and, Kim Santos, Director, Office of Credit Unions, Wisconsin Department of Financial Institutions. Elected to the board was Bryan A. Schneider, Secretary, Illinois Department of Financial and Professional Regulation. The trio were elected to three-year terms
Re-elected to the NASCUS Credit Union Advisory Council were Jason Boesch, of Energize Credit Union in Oklahoma City; and, Mike Ryan of BECU in Tukwila, Wash. The pair were elected to serve three-year terms. Additionally, John Turpish of VyStar Credit Union in Jacksonville, Fla., was appointed by Council Chairman Patty Idol to take the seat of retiring member Terry West (who was also honored at the Summit with the association’s Pierre Jay Award). And, Jeff Dahlstrom of Southeast Financial Credit Union in Franklin, Tenn., was appointed to a one-year term on the Council.
Additionally, the NASCUS Board and Credit Union Council adopted resolutions recognizing contributions of regulator and credit union industry members. Regulator members honored were Jay Bienvenu, MA; Bob Entringer, ND; Scott Jarvis, WA; JoAnn Johnson, IA; Dennis Patten, RI; Patty Salazar, CO; and Ingrid White, NH. Credit union members honored were: Linda Childs, TNConnect CU, TN; Terry West, VyStar CU, FL; and Arty Arteaga, Defense Credit Union Council.
BRIEFLY: Fischer to leave FRB in October; CUAid for hurricane relief; alert issued for scams in storms
Stanley Fischer, vice chairman of the Federal Reserve Board of Governors has resigned, effective Oct. 13, the central bank announced this week. He joined the board in May 2014; his term was scheduled to end in January 2020. In a statement, Fed Chairman Janet Yellen said the 73-year-old Fischer “contributed invaluably to our monetary policy deliberations,” and led the board’s efforts to foster financial stability … The National Credit Union Foundation has activated the online disaster relief system CUAid.coop to raise money for credit union people in Texas affected by Hurricanes Harvey and Irma … Hurricane disaster survivors – including those from storms Harvey and Irma — and their friends and family must be alert for false rumors, scams, identity theft, and fraud, the Federal Emergency Management Agency (FEMA) is urging. To dispel some of the false rumors circulating on the internet and social media, the emergency agency has created a dedicated website to address some of the most common fraud themes.
Patrick Keefe, email@example.com
For more information about NASCUS publications, or to obtain permission to reprint a NASCUS publication, please contact NASCUS' Communications Department.