Letter to Credit Unions No.: 13-CU-14 Projected 2014 Stabilization Fund Assessment and Share Insurance Fund Premium Range
NCUA has issued Letter to Credit Unions 13-CU-14 (LTCU 13-CU-14) to provide federally insured credit unions with a projected range for Temporary Corporate Credit Union Stabilization Fund (Stabilization Fund) assessments and National Credit Union Share Insurance Fund (NCUSIF) premiums for 2014. The projections are intended to help credit unions in their budget planning for the upcoming year, however, NCUA reserves the right to reconsider and adjust the projected assessments should unexpected adverse conditions arise. The letter cautions credit unions not to expense any assessment or premium until it is actually declared by the NCUA Board, and not to use the projection as the basis for any accruals or future expenses.
NCUA projects no assessment for the Stabilization Fund and a NCUSIF premium range of 0 to 5 basis points (bps) of insured shares. Although the estimated premium range has been somewhere between 0 and 10 basis points for the last three years, NCUA has not charged a NCUSIF premium since 2010 when the premium was at 12.42 bps. Although the NCUSIF equity ratio is currently slightly above the statutorily mandated 1.30% normal operating level, the ratio is projected to decline to a level between 1.25% and 1.29% due to strong growth in insured shares and low yield on NCUSIF investments. Last year the Stabilization Fund assessment was 8 bps.
The agency credits its landmark $1.417 billion settlement with JPMorgan Chase for alleviating the need for a Stabilization Fund assessment this year. The net proceeds from the settlement will be paid to the U.S. Treasury to reduce NCUA’s outstanding borrowings related to the corporate resolution program. NCUA continues to pursue litigation against 16 other securities firms for selling faulty mortgage-backed securities to the failed corporate credit unions. The Treasury debt must be fully repaid before any remaining funds may be distributed to credit unions, and projections from BlackRock indicate that the debt is not likely to be repaid prior to the 2021 expiration of the Stabilization Fund. Consequently, while credit unions may not face additional Stabilization Fund assessments, they will most likely not receive any disbursements prior to 2021.
For more information regarding corporate system resolution costs or the NCUA Guaranteed Notes (NGN) portfolio, visit the below websites:
Letter to Credit Unions No.: 13-CU-13 Changes to NCUA Regulations Related to Credit Union Service Organizations
NCUA published LTCU 13-CU-13 to provide credit unions information on the agency’s final credit union service organization (CUSO) rule published during the November 2013 board meeting. The regulatory changes in the new final rule become effective on June 30, 2014. NCUA’s CUSO rule is found at Part 712. FISCUs are required to comply with provisions of Part 712 by Part 741.222.
The primary changes to CUSO regulation made by NCUA’s new final rule include the following:
- NCUA will require CUSOs to provide reports directly to NCUA rather than NCUA requiring credit unions report CUSAO data on the 5300 Call Report and On-line Profile.
- NCUA is extending CUSO regulations to all levels, or tiers, of a CUSO’s structure, including any subsidiary in which a CUSO has an ownership interest of any amount. The subsidiary will be treated as a CUSO, and is subject to NCUA’s regulations if it is engaged primarily in providing products or services to credit unions or credit union members.
- NCUA will create an on line registration system for CUSOs by December 31, 2015. When the system is operational, CUSO will submit NCUA’s required data via the on line registry.
Two additional requirements (already applicable to FCUs) are being extended to FISCUs and their CUSOs:
- Before investing in or lending to a CUSO, a credit union must obtain a written agreement from the CUSO indicating that the CUSO will account for all transactions in accordance with generally accepted accounting principles; prepare quarterly financial statements; and obtain an annual financial statement audit of financial statements by a licensed certified public accountant in accordance with generally accepted auditing standards.
- A FISCU that becomes less than adequately capitalized must obtain prior written approval from its state regulator and notify the NCUA before making any additional investments in a CUSO if the total aggregate cash outlay (measured over the past 7 years) exceeds the investment limit in the state in which the credit union is chartered. If there is no limit in the state in which the credit union is chartered, then the credit union’s aggregate cash outlay is limited to 1% (FCU limit).
As noted above, NCUA will require CUSOs to report directly to NCUA as soon as the agency develops an on line registry. For purposes of data submission, NCUA created 3 categories:
1) All CUSOs – All CUSOs, regardless of their products and services, would be required to furnish to NCUA:
- The CUSO’s Tax ID number and legal name
- The CUSO’s address, telephone number, URL, and contact person
- Services offered by the CUSO
- List of all FICUs that invest in, lend to, or receive services from the CUSO
- Information on any parent, or subsidiary, CUSOs
2) Complex or High Risk CUSOs – CUSOs that offer complex or high risk services will be required to provide NCUA additional information. NCUA is defining complex/high risk as CUSOs that provide credit and lending, information technology, custody, safekeeping, and investment management services for FICUs. These CUSOs must provide NCUA:
- List of services provided each FICU client/customer
- Investment, loan, or level of activity of each FICU
- Annual financial statements
3) Credit or Lending CUSOs – CUSOs that provide credit or lending services would also have to provide:
- Total dollar amount of loans outstanding
- Total number of loans outstanding
- Total dollar amount of loans granted year-to-date
- Total number of loans granted year-to-date
Letter to Credit Unions No.: 13-CU-12 Supervisory Guidance on Enterprise Risk Management
NCUA issued LTCU 13-CU-12 to clarify NCUA’s supervisory expectations regarding credit unions’ risk management systems and provide credit unions with the supervisory instructions NCUA provided its examiners. Enterprise risk management (ERM) is a process in which an organization takes a broad look at all its risk factors across the organization, understands how those risk factors interrelate, defines an acceptable level of risk and establishes monitoring to ensure established risk thresholds are maintained. NCUA notes that credit unions conducting ERM may perform the function internally, by use of independent third parties, or both. No matter how a credit union develops or organizes its ERM program, it should contain certain fundamental elements:
1) Established Risk Culture – Organization should set the tone from the top that establishes the risk appetite for the organization, and for how is risk is viewed and managed at all levels.
2) Clear Objectives – An ERM program encourages management to set clear strategic, operations, reporting and compliance objectives that align the organization’s mission, risk appetite and actual risk.
3) Event Identification – Organization should identify internal and external events that affect ability to manage risk and achieve objectives.
4) Risk Assessment – The organization continuously analyzes risk, considering the potential impact of various scenarios and uses the results to develop its risk management program.
5) Risk Response – Management evaluates possible responses to risks (avoidance, acceptance, reduction, or sharing) and develops a response to bring risks within organization’s tolerance.
6) Control Activities – A set of policies and procedures established and implemented to ensure the organization effectively responds to risk.
7) Information & Communication – Relevant information is identified, captured, and communicated to stakeholders to help them carry out their responsibilities. Key strategic information is communicated throughout the organization.
8) Monitoring – The entire risk management program is monitored and evaluated with modifications made as necessary.
Implementing an effective and meaningful ERM program requires a significant investment in management, expertise and systems. Therefore, NCUA regulations only require corporate credit unions to implement an ERM program. NCUA does not require natural person credit unions, of any size, to implement a formal ERM program.
NCUA instructs its examiners that when examining smaller, less complex natural person credit unions, they should ensure the risk management framework is sufficient given the credit union’s business strategy and objectives. Larger more complex credit unions should be expected to have a comprehensive risk management approach which may, or may not, include an ERM program.
In evaluating whether a credit union’s risk management approach is sufficient, NCUA instructs its examiners to consider the following:
- the credit union’s policies, procedures, and controls in relation to potential risk exposure
- the credit union’s risk posture, appetite and risk management strategies
- the credit union’s products and services and breadth and depth of potential risk exposure
- concentrations of risk within the credit union
- all risk mitigating factors
- the capability and resources of management
- current and historical performance management
- the financial strength of the credit union in relation to assets and activities
NCUA expects its examiners to perform an comprehensive enterprise wide risk assessment pursuant to Chapter 3 of NCUA Examiner’s Guide. Examiners are instructed to address poorly managed or excessive risk by identifying the underlying managerial, operational, and strategic deficiencies resulting in the unacceptable risk exposure. The absence of adequate risk management frameworks or programs consistent with the credit union’s size, complexity and risk exposure is a failure of sound governance.
Letter to Credit Unions No.: 13-CU-11 Electronic Filing of Call Reports and Extended Filing Dates for 2014
NCUA published LTCU 13-CU-11 to discuss its new requirement, finalized on October 24, 2013, requiring all federally insured credit unions to file quarterly Call Reports and Profile data electronically.NCUA has adjusted Call Report filing deadlines for 2014 to provide additional time for credit unions to file. The rule takes effect beginning in 2014 with the filing of 4th quarter 2013 data in January 2014.
For 2014, NCUA has adjusted all Call Report and Profile submission due dates to the fourth Friday of each month following the end of a quarter. The filing dates are as follows:
- The December 31, 2013 cycle filing deadline will be January 24, 2014
- The March 31, 2014 cycle filing deadline will be April 25, 2014
- The June 30, 2014 cycle filing deadline will be July 25, 204
- The September 30, 2014 cycle filing deadline will be October 24, 2014
Credit unions that fail to file an electronic call report may be subject to supervisory actions including civil money penalties.
Credit unions seeking assistance in filing of the Call Reports may reference the CU On-Line page of NCUA’s website.
The Office of Small Credit Union Initiatives (OSCUI) is also available to assist credit unions converting from manual filing to the mandatory electronic filing. To obtain assistance from OSCUI, credit unions may send a request to OSCUIMail@NCUA.gov or call 703-518-6610.
Letter to Federal Credit Unions: 13-FCU-03 Potential Violations of Common Bond Advertising Requirements
NCUA Tells Federal Credit Unions to Stop Advertising “Anyone May Join”
NCUA has issued a Letter to Federal Credit Unions, 13-FCU-03 Potential Violations of Common Bond Advertising Requirements, to warn federal credit unions that if they advertise that anyone, without limitation, is able to become a member of the credit union, then they may be in violation of federal law and regulation. NCUA notes that such campaigns, as well as federal credit union advertising that “membership is open to anyone” mislead consumers about single and multiple common bond membership requirements for federal credit unions.
NCUA notes that these situations are generally related a federal credit union’s use of associational membership. NCUA rules, specifically the Chartering and Field of Membership Manual, explain the requirements for the associational common bond. NCUA determines whether a group satisfies the associational common bond requirements based on a “totality of the circumstances” test, which has the following seven factors:
1) Whether members pay dues;
2) Whether members participate in the furtherance of the goals of the association;
3) Whether the members have voting rights;
4) Whether the association maintains a membership list;
5) Whether the association sponsors other activities;
6) The association’s membership eligibility requirements; and
7) The frequency of meetings.
NCUA’s Office of Consumer Protection has begun conducting quality control reviews of federal credit unions that may be improperly using associations to sign up members without a common bond.
In addition to possibly violating NCUA’s field of membership rules, NCUA notes that federal credit unions advertising that “membership is open to anyone” might also violate § 740.2 of NCUA’s Accuracy of Advertising rule. That is because language to the effect that “anyone can join” or “membership is open to everyone”—without any qualifying language—can give the impression that the Federal Credit Union Act’s single or multiple common bond requirements do not apply and is therefore inaccurate or deceptive.
Letter to Credit Unions No.: Guidance on How to Comply with NCUA Regulation §741.12 Liquidity and Contingency Funding Plans
NCUA published LTCU 13-CU-10 to advise credit unions of their responsibilities pursuant to the recently finalized Part 741.12, Liquidity and Contingency Funding Plans. The rule was finalized on October 24, 2013 and becomes effective on March 31, 2014.
The new rule requires all federally insured credit unions (FICUs) to have liquidity plans to respond to adverse circumstances. The rule is tiered, requiring FICUs with less than $50 million in assets to maintain a basic written board approved policy that provides a framework for managing liquidity and a list of contingent liquidity sources that can be employed under adverse circumstances. The rule requires FICUs with assets of $50 million or more to have a contingency funding plan that clearly sets out strategies for addressing liquidity shortfalls in emergency situations. Finally, under the third tier, the rule requires FICUs with assets of $250 million or more to have access to a backup federal liquidity source for emergency situations.
The basic board approved policy should include:
•the purpose, objectives, and goals of liquidity management
•a definition of liquidity risk and why it is important to manage
•the threshold and limits for liquidity risk tolerance, including identification of the appropriate ratios that can signal changing liquidity conditions, preparation of periodic cash flow projections, and establishment of a minimum cash-on-hand target
• minimum balances for short-term and overnight funds that are sufficient to maintain a business-as-usual posture
•procedures for reporting liquidity levels to the board
•triggers for implementing contingency plans and what sources of liquidity may be tapped
•timetable for periodic review and revision of plan (at least annually and as necessary)
Credit unions with $50 million or more in total assets are required to have a more comprehensive liquidity policy that incorporates a contingency funding plan (CFP). A CFP includes policies, procedures, projection reports, and action plans designed to ensure sources of liquidity are sufficient to fund operations under contingent liquidity events. A CFP should include:
•a process to forecast and assess whether the credit union’s liquidity sources are adequate to meet normal and contingent needs
•identify specific contingency sources specify how the credit union will manage a range of liquidity-stress events
•identify the lines of authority within the credit union responsible for managing liquidity events
•outline the management processes the credit union will follow when responding to liquidity events
•specify the frequency that the credit union will test its plan and make any necessary updates
Letter to Credit Unions No.: 13-CU-09 Exam Report Modernization
NCUA has issued Letter to Credit Unions 13-CU-09 (LTCU 13-CU-0) to inform federally insured credit unions of changes to NCUA’s examination report being made part as NCUA Chairman Matz’s Regulatory modernization initiative. The guidance includes as enclosures Chapter 11(section 3) and Chapter 13 of NCUA’s National Supervision Policy Manual (NSPM) and new templates for Examiner Findings and Documents of Resolution. NCUA states it made the changes to ” streamline the examination report, better clarify the priority exam action items to be resolved, reduce redundancy, and ensure consistency.”
NCUA is separating the Document of Resolution (DOR) and Examiner’s Findings into stand alone documents when it issues a report of examination. NCUA has also created specific definitions of the purpose of each document to help guide NCUA examiners and provide federally insured credit unions a better understanding of the distinction between “major” and “minor” issues. Starting January 1, 2014, material problems identified in an NCUA exam, the NCUA examiner’s concern and documented support for that concern will be included in the DOR, along with corrective action plans. Less urgent problems will be identified in the examiner’s findings.
Other changes to NCUA’s examination process include:
- Examination Overview – NCUA examiners will no longer use the overview to discuss detailed problems identified during the exam. Rather, the overview continue to disclose the credit union’s CAMEL ratings and risk ratings but otherwise contain only a high level discussion of the credit union’s risk profile and financial trends.
- Document Resolution – Under the new format, NCUA examiners will document and provide detailed support for problems meeting the DOR definition outlined in the NSPM. They will also document corresponding corrective actions.
- DOR Status Report – Currently, the status of the DOR is documented in a variety of places including the Supplementary Facts, Excel workbook, or blank Word document. NCUA has created a new document titled the “DOR Status Report.” The new document will summarize the status of prior or outstanding DORs, including DORs that were resolved since the last exam or contact.
- Examiner’s Findings – NCUA examiners will document problems that do not rise to a DOR in this section.
- Informal Discussion Items – This section is currently used for a variety of purposes, including by some examiners to document minor issues. Beginning January 1, 2014, this section is being eliminated entirely. Examiners will instead document any problems and corrective actions in either a DOR or the Examiner’s Findings sections.
- Supplementary Facts – This form is also currently used for a variety of purposes with some NCUA examiners including the status of the DOR or outstanding administrative action in the Supplementary Facts. Starting January 1, 2014, NCUA examiners may use this form to provide recommendations or suggestions, but must document them as such.
- Status Update Template – A new document titled Status Update will provide the status of outstanding administrative actions, including Letters of Understanding (LUAs) and Preliminary Warning Letters (PWLs).
In addition to changes to the examination report documents, NCUA is also implementing new processes related to issuing and following up on the examination report. Starting in 2014, new processes will include:
- credit unions instructed in a DOR to cease an activity that is deemed unsafe and unsound will be required to write to the RD seeking authority to resume the activity after corrective measures taken
- NCUA examiners will now be required to follow up with credit union officials on outstanding DOR items within 120 days after the timeframe for completion has passed.
NCUA’s LTCU 13-CU-08 makes FISCUs aware of Interagency Guidance on Privacy Laws and Reporting Financial Abuse of Older Adults. The guidance clarifies that if a financial institution suspects an account holder may be a victim of elder abuse or financial exploitation, it may report the suspected abuse to law enforcement, social services, and other local, state or federal agencies without violating the privacy provisions of the Gramm-Leach-Bliley Act (GLBA). It is important to note that NCUA Letter to Credit Unions, and the Interagency Guidance, generally address only the GLBA privacy provisions. Credit unions should ensure they are aware of and compliant with any and all other applicable state or federal laws regarding this matter.
As a general rule under the GLBA, a financial institution may not disclose any nonpublic personal information about a consumer to any nonaffiliated third party unless it first provides the consumer with a notice that describes the disclosure (as well as other aspects of its privacy policies and practices) and a reasonable opportunity to opt out of the disclosure, and the consumer does not opt out. However, the law contains several exceptions to the prohibition:
- A financial institution may disclose nonpublic personal information to comply with federal, state, or local laws, rules and other applicable legal requirements, such as state laws that require reporting by financial institutions of suspected abuse.
- A financial institution may disclose nonpublic personal information to respond to a properly authorized civil, criminal, or regulatory investigation, or subpoena or summons by federal, state, or local authorities or to respond to judicial process or government regulatory authorities having jurisdiction for examination, compliance, or other purposes as authorized by law.
- A financial institution may disclose nonpublic personal information to protect against or prevent actual or potential fraud, unauthorized transactions, claims, or other liability.
The Interagency Guidance notes that elder abuse fits within those exceptions and summarizes possible signs of elder abuse:
- Erratic or unusual banking transactions or changes in banking patterns
- Frequent large withdrawals or sudden non-sufficient fund activity
- Uncharacteristic nonpayment for services (may indicate loss of funds or access to funds)
- Debit transactions that are inconsistent for the older adult
- Uncharacteristic attempts to wire large sums of money
- Closing of CDs or accounts without regard to penalties
- A caregiver or other individual shows excessive interest in the older adult’s finances or assets, does not allow the older adult to speak for himself, or is reluctant to leave the older adult’s side during conversations
- The older adult shows an unusual degree of fear or submissiveness toward a caregiver, or expresses a fear of eviction or nursing home placement if money is not given to a caretaker
- The financial institution is unable to speak directly with the older adult, despite repeated attempts to contact him or her
- A new caretaker, relative, or friend suddenly begins conducting financial transactions on behalf of the older adult without proper documentation
- The older adult moves away from existing relationships and toward new associations with other “friends” or strangers
- The older adult’s financial management changes suddenly, such as through a change of power of attorney to a different family member or a new individual
- The older adult lacks knowledge about his or her financial status, or shows a sudden reluctance to discuss financial matters
Financial institutions are encouraged to access additional resources. FinCEN’s May 2013 “The SAR Activity Review”discusses the use of Suspicious Activity Reports to report suspected elder financial exploitation. In addition, the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation developed Money Smart for Older Adults, another useful resource for training and raising awareness about preventing, identifying, and responding to elder abuse or financial exploitation.
Letter to Credit Unions No.: 13-CU-07 Loan Participation Waivers
NCUA has issued Letter to Credit Unions 13-CU-07 (LTCU 13-CU-07) to provide credit unions guidance on the recent final Loan Participation rule. The guidance included as an enclosure the Supervisory Letter No. 13-04 NCUA issued to its examiners.
The final Loan Participation rule includes concentration limits based upon 2 thresholds:
- 100% of net worth for mid-sized and larger credit unions purchasing from a single originator
- $5 million purchased from a single originator for small credit unions
The rule also contains:
- grandfather provisions for credit unions exceeding limits on the effective date of September 23, 2013
- provisions for differing underwriting standards for originators and participants
- a 5% risk retention requirement for purchases from FISCUs
- a 15% limit on purchases of loans to any one borrower
- individual and pass through waiver provisions
The Supervisory Guidance issued to NCUA examiners and enclosed with the Letter to Credit Unions includes:
1) Waiver of the single originating lender concentration limit: the greater of $5 million or 100% of the purchasing credit union’s net worth
- participations in loans originated by a CUSO will not be aggregated with participation interests in loans originated by the CUSO’s owner credit union for the purpose of the single originating lender limit
- CUSO arrangements may not be used to “round-robin” arrangements to circumvent the requirements of the final rule
- the limits and waivers apply to all loan participations (MBL and non-MBL)
2) Waiver of the single borrower concentration limit: 15% of purchasing credit union’s net worth
- as with waivers of the single originating lender concentration limit, waiver applications of the single borrower concentration limit only include the credit union’s participation amount and not the entire loan
3) Loan retention requirements
- FCUs that serve as the originating lender in a loan participation must retain at least 10% of the loan, otherwise, all FISCUs may only purchase a participation interest in loans from eligible originating lenders that retain at least a 5% interest in the loan(s) being participated
4) Waivers Obtained by the Originating Lender and Passed Through to Participating Credit Unions
- For borrower or loan level waivers, if the originating lender obtains a waiver for a loan, the participating credit unions do not also have to obtain waivers for their participation interests. However, if the originating lender does not obtain a waiver for a loan, each participant is required to obtain its own waiver for its interest in the participated loan. These types of waivers include:
– appraisal requirements
– minimum borrower equity requirements for construction and development loans
– loan-to-value ratio requirements
– personal liability and guarantee requirements
- For credit union level waivers, the participating credit union(s) must obtain its own waiver. These types of waivers include:
– single originating lender concentration limit
– single borrower concentration limit
– aggregate construction and development loan limits
– maximum unsecured business loans to one member or group of associated members
– maximum aggregate unsecured member business loan limit
5) One-Time Waivers vs. Blanket Waivers
Credit unions may seek either a one-time waiver designed to meet a specific need of an individual or small set of borrowers, or a temporary exigent event or a blanket waiver that gives the credit union authority to conduct lending activities at limits above those established in the regulation. Credit unions seeking either waiver should do in advance of a pending loan.
NCUA’s guidance includes specific information required to be submitted as part of a waiver application, including:
- copies of all pertinent lending policies, underwriting standards, and the credit union’s loan participation policy
- the requested waiver and the need for the waiver
- the credit union’s experience with the type of lending involved
- documentation supporting the credit union’s ability to manage and monitor the participation loan activity, including risk mitigation measures
- documentation of the resolution of any issues identified in the last examination
6) Waiver Request Considerations by NCUA
NCUA states that it expects credit unions seeking waivers to be healthy and well-run with sound lending programs. Generally, this would include credit union being well capitalized pursuant to §702 of NCUA’s Rules and Regulations (PCA) and having composite and Management and Asset Quality component CAMEL ratings of 1 or 2. In acting on a request for a waiver, NCUA notes that it will evaluate the following:
- the credit union’s financial capacity, management capability, experience, and ability to absorb and manage the type of risk being assumed
- the credit union’s ability to conduct due diligence tailored to the complexity of the third-party relationships involved
- the credit union’s history of financial and operational performance
- the credit union’s loan participation policies and procedures, underwriting standards, concentration limits for collateral types, geographical locations, and other key risk factors
- the capability of the credit union’s risk management systems and processes
NCUA states that credit unions requesting blanket waivers will need to meet high standards of lending and management capability, including:
- strong loan underwriting and demonstrated portfolio management expertise
- appropriate lending, accounting, and legal expertise
- string policies, procedures, quality and internal controls
- effective, well developed, corporate governance practices
- sufficient levels of net worth consistent with the size, concentrations, and complexity of risks present in the credit union’s business model
When evaluating applications for waiver of the single borrower concentration limit, NCUA states it will consider:
- the creditworthiness of the borrower
- the quality underwriting for loans previously granted to the specified borrower
- effectiveness of the credit union’s management of loans that previously received waivers
7) Timing of Waiver Responses and Appeals
NCUA will respond to a waiver request within 45 days of receiving a completed application, or in the case of FISCUs, a completed application and the concurrence of the state regulator. A credit union may appeal all or part of the NCUA regional director’s waiver decision to the NCUA Board within 60 days of the determination.
8) Waiver Violations
NCUA’s examiners are to treat waiver violations as a major concern and require prompt resolution of the violation. The NCUA RD may revoke a waivers based upon safety and soundness concerns.
9) Loan Participation Policy Requirements
Credit unions must have written loan participation policies that must include:
- established underwriting standards for loan participations
- policies and procedures to ensure compliance with applicable laws and regulations
- establish limits on the amount of loan participations by loan type, not to exceed a reasonable percentage of the credit union’s net worth
10) Loan Participation Master Agreement Requirements
At a minimum, the loan participation master agreement must:
- Be properly executed by all parties and a copy retained in the credit union’s office
- Clearly delineate the obligations of the originating lender, servicer, and participants with respects to servicing, default, foreclosure and other real estate owned, collection, and administration of the loan(s)
- Contain a provision requiring the originating lender retain the required percentage of the loan (either 10% or 5% pursuant to Part 701.22(b)(3)
- Identify each participated loan
- Disclose the location and custodian for the original loan documents
- Enumerate servicing responsibilities for the loan, circumstances and conditions under which participants may replace the servicer
- Include disclosure requirements about the ongoing financial condition of the loan
Letter to Credit Unions No.: 13-CU-06 2013 Corporate Stabilization Fund Assessment
At its July 25, 2013 open meeting the NCUA Board declared an assessment for the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) of 8 basis points (.08%) of insured shares as of June 30, 2013. NCUA had previously estimated a range of 8-11 basis points.
Each federally insured credit union will receive an invoice in September for the 2013 assessment. Payment on the invoices will be due to NCUA by October 16, 2013. Credit unions should have expensed the assessment in July and must report the entire expense on the September 30, 2013, Call Report using the Temporary Corporate CU Stabilization Fund Assessment line (account code 311) on the Statement of Income and Expense.
NCUA’s LTCU 13-CU-06 discusses issues generally related to the TCCUSF. It notes for the prior 3 years annual assessments were driven by the cash needs of the TCCUSF. This year, NCUA is setting the assessment to help repay the system’s obligation to Treasury. NCUA estimates that the 2013 assessment will generate $700.9 million and after making a repayment this year the outstanding borrowings from Treasury will total about $4.075 billion.
NCUA notes that federal examiners continue to be instructed to to take into account the impact of the assessment when evaluating and rating credit union earnings and net worth performance. The guidance also refers readers to LTCU 09-CU-23, Reviewing Adequacy of Earnings, which emphasizes the supervisory guidance given to examiners about the evaluation of earnings.
Letter to Credit Unions No.: 13-CU-05 Guidance: Investing in Securities without Reliance on Credit Ratings
NCUA issued Letter to Credit Unions LTCU 13-CU-05 to provide credit unions a copy of the Supervisory Letter 13-03provided its examiners addressing the removal of references to credit ratings in NCUA’s regulations and the substitution of other standards of creditworthiness. The removal of references to credit ratings was mandated by § 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
NCUA has replaced minimum rating requirements with a requirement that credit union investment officials conduct and document credit analyses demonstrating that each issuer has demonstrated a capacity to meet its financial commitments. Specifically, NCUA has made changes to Parts 703, 704, 709 and 742 of NCUA Rules and Regulations.
The changes primarily affect federal credit unions. For federally insured state charters, the rule is applicable in determining whether a state investment is non-conforming and in need of special reserve pursuant to §741.3(a)(2).
In its guidance, NCUA states that it expects FCUs to consider a number of factors when making a creditworthiness determination for an investment. NCUA also specifically notes that FCUs may continue to use credit ratings to supplement their due diligence but may not use ratings as the sole basis for decision making. A credit union’s due diligence on a security should be commensurate with the security’s credit quality, the complexity of the structure, and the size of the investment.
When evaluating a security’s credit risk, a FCU may consider:
- Credit spreads
- Internal or external credit risk assessments
- Default statistics
- Whether a security, or issuer of the security, is included as a component of a recognized index of instruments
- Priorities and enhancements
- Price, yield, and/or volume
NCUA’s Supervisory Guidance also addresses FCU obligations with respect to structured securities, noting that credit risk determination may be influenced by the quality of the underlying collateral, the securities’ cash flow rules, and the structure of the security itself more than the condition of the issuer. NCUA expects FCUs to understand the creditworthiness for an investment security relying on the cash flows and collateral of the underlying assets for repayment and to demonstrate an understanding of the features of a structured security that would materially affect its performance. FCUs are also expected to use scenario analysis to understand how the structured security performs different economic environments.
The guidance provides the following elements for FCUs to consider in assessing credit worthiness:
- Class/tranche and position in the cash flow waterfall of a securitized structure
- Loss allocation rules, definitions of default, impact and market value triggers
- Support provided by credit enhancements and/or liquidity enhancements, such as excess spread, overcollateralization and reserve accounts
- Risk concentrations in underlying collateral, such as local demographics and economics that may contribute to default or diminished repayment
- Contributing factors in special servicing, legal and credit administration
- Quality and consistency of underwriting of underlying collateral
- The impact of collateral deterioration on tranche performance, default rates and loss severities under adverse circumstances
- Performance of individual commercial properties in the case of commercial mortgage related securities
- Present and future contribution of guarantees when issued by government agencies
With respect to vendors, while FCUs may contract with vendors to determine credit worthiness, it remains the FCU’s responsibility to make the final determination of whether the investment is permissible under §703.14.
Other topics addressed in the guidance include:
- Mutual Funds – M utual funds only permissible if all holdings are securities that are permissible under §703.14.
- Grandfathered investments – FCUs were provided a grandfather clause for certain municipal securities and transactions exceeding new limits.
- Risk of deterioration – FCUs have an ongoing obligation to reevaluate creditworthiness of their securities and address deterioration as appropriate.
Letter to Credit Unions No.: 13-CU-04 Streamlined Process for Evaluating Low-Income Designation
NCUA issued LTCU 13-CU-06 to inform federally insured state-chartered credit unions (FISCUs) of the process by which NCUA will designate an eligible credit union as a low income credit union (LICU). A LICU has additional regulatory authority to:
- Raise supplemental capital that counts toward net worth
- Accept non-member deposits from any source
- Make member business loans beyond the statutory cap
- Apply for grants and low-interest loans from the National Credit Union Administration’s Community Development Revolving Loan Fund
NCUA notes that because of “a cooperative effort between NCUA and the National Association of State Credit Union Supervisors, state regulators can now elect to provide encrypted member geographic data to NCUA when uploading examinations.” NCUA would then use that confidential data for the sole purpose of determining which FISCUs are eligible for a LICU designation. Participating state regulators could receive a list of their eligible FISCUs on a quarterly basis.
To qualify as a LICU, a credit union must have a majority of its membership meet the low income thresholds defined in the NCUA Rules and Regulations: members’ income must be at or below 80% of comparable median family income or median earnings for individuals in their
geographic area, their state, or the nation.
Credit unions also remain free to contact NCUA to perform analysis at any time to determine LICU eligibility.
Questions regarding the low-income designation should be directed to NCUA’s Office of Consumer Protection at 703-518-1150 or DCAMail@ncua.gov .
Letter to Credit Unions No.: 13-CU-03 Supervisory Guidance on Troubled Debt Restructuring
NCUA issued LTCU 13-CU-03 to provide credit unions with guidance the agency had prepared for its examiners on applying new examination procedures on loan workouts, nonaccrual, and troubled debt restructuring (TDR).
The Letter to credit Unions and enclosed Supervisory Letter should help credit unions understand the examiners’ focus on the specific components of a sound workout program including:
- The revised regulatory reporting requirements for loan workouts;
- What you should address in a workout policy including controls and decision-support systems consistent with the size and scope of your program;
- Key components of a sound information system for loan workouts and TDRs; and
- Appropriate nonaccrual policies and procedures for loan workouts and TDRs.
NCUA’s guidance to its examiners outlines changes to its rule § 741.3(b)(2) and the addition of new Appendix C to the section. The guidance also discusses several related accounting issues. In making the changes to troubled debt restructuring (TDR) and loan workouts, NCUA is trying to balance providing credit unions the flexibility to work with members while continuing to address regulatory concerns. From a supervisory perspective, TDR can mask deteriorating loan portfolios by obscuring true charge off levels. TDR can also allow a credit union to delay loss recognition resulting in an understated allowance for loan and lease losses (ALLL) account and inaccurate loan valuations as well as allowing for an overstatement of net income and regulatory capital levels.
After reviewing NCUA’s changes to TDR, the guidance discusses the responsibilities of the examiner. During the exam, examiners will check to see if the credit union has outstanding workout loans or is planning to begin this activity. When scoping the loan workout review, examiners will consider the following:
- Does the credit union have appropriate system capability and internal controls to track and monitor all workout activity given the size and complexity of the organization?
- What is the balance of workout activity including TDRs?
- What is the balance of TDR compared to workout activity?
- What is the(%) of workout or TDR activity in relation to capital/earnings/volume of loan activity?
- Is the level of earnings sufficient to withstand proportionate incremental differences in ALLL valuations without causing a reader of the financial statements to reach incorrect conclusions about the health of the credit union?
- How great would incorrect accounting/valuation need to be to result in a lower net worth category?
- How great would incorrect accounting/valuation need to be to cause positive earnings to become negative?
- Are there external local economic variables that could result in a more material impact from misclassification (e.g. local real estate price trends, local unemployment rates, sponsor layoffs, etc.)?
A sound credit union TDR policy/program should:
- Be commensurate with the credit union’s size and complexity and compatible with the credit union’s enterprise risk management strategies. The TDR program must consider risk factors including the field of membership, present and future economic conditions, impairment thresholds, borrower specific conditions, and risk limits to the loan workout activity.
- D efine borrower eligibility requirements, including limits on the number of times an individual loan may be modified. Eligibility requirements should consider such factors as types of loans that will be worked out, limits on collateral or loan types, how collateral will be valued, when will additional collateral be required, when loans become eligible for workout (must the borrower be delinquent), and what the new underwriting standards would be for reworked loans.
- Ensure the credit union makes loan workout decisions based on the borrower’s renewed willingness and ability to repay the loan. Communications with the borrower reflecting a renewed willingness to repay should be documented.
- Establish sound controls to ensure responsible staff appropriately structure loan workout actions. This includes reporting to the board and compliance will all applicable regulations.
NCUA’s guidance discusses the role of the credit union management at length, noting that management information systems should support the control and monitoring of workout loans within the credit union. For example, although credit unions are only required to report TDRs on the quarterly 5300, management should always be able to appropriately identify and segregate TDR and non-TDR workouts and maintain monthly reports of this activity. The guidance also discusses the importance of documentation of loan workout decision. Documentation may vary depending on whether the loan is a member business loan or a consumer loan and the guidance refers readers to the following previous guidance on loan types: LTCU 10-CU-07, Commercial Real Estate Loan Workouts (June 2010) and LTCU 09-CU-19, Evaluating Residential Real Estate Mortgage Loan Modification Programs (September 2009).
The guidance also discusses:
- Proper income recognition and new loan nonaccrual requirements
- Requirements for returning loans to accrual status, noting the differences for MBLs and non-MBL loans
- The distinctions between TDR workouts and non-TDR workouts – NCUA makes clear that its guidance does not alter FASB’s definition of a TDR
- Timely recognition of losses – credit unions must adjust historical loss factors when calculating ALLL needs for pooled loans to account for any loans with protracted charge-off timeframes (loans greater than 12 months past due). For example, the pool loss rate should be adjusted upward for an internal qualitative and environment factor when the credit union inappropriately delays charge-offs.
NCUA guidance notes that both credit unions and examiners should use the amount and trending of non-accruing TDRs as a risk indicator to gauge if workout strategies are improving loan collectability. Credit union workout policies and practices should be modified accordingly. Examiners will review representative sample of loan workouts that have re-defaulted and loans subject to multiple workouts to assess the credit union’s compliance with part 741, the soundness of the credit union’s workout program, and the accuracy of financial and statistical reports.
Letter to Credit Unions No.: 13-CU-02 Member Business Loan Waivers
NCUA issued LTCU 13-CU-02 to share with credit unions Supervisory Letter 13-01 that NCUA issued to its examiners providing guidance for processing MBL waivers pursuant to §723 of NCUA’s rules. Credit unions may seek waivers from the following provisions: §722.3 Appraisal Requirements; §723.3(a) the 15% construction and development (C&D) loan limit; §723.3(b) the 25% equity requirement in C&D loans; §723.7(a) the 80% and 95% loan to value ration requirements; §723.7(b) the personal guarantee; §723.7(c)(2) the unsecured MBL to one member limit of $100K or 2.5% of net worth; §723.7(c)(3) the 10% of net worth aggregate limit on unsecured MBL; and §723.8 the aggregate limit of $100K or 15% of net worth to MBL loans to one member.
Generally speaking, there are two types of waivers from NCUA’s member business lending rule available: (1) an individual transaction waiver (waivers for an individual or specific list of loans), and (2) a blanket waiver of a specific regulatory requirement. The one-time waiver is designed to allow a credit union to meet the needs need of an individual or small set of borrowers, or a temporary exigent event such as a natural disaster. The blanket waiver allows a credit union to conduct lending activities with respect to any MBL borrower without having to comply with a specific provision(s) of the regulation.
To obtain a waiver, FISCUs should submit the request to its state regulator. If the state regulator approves the waiver, it will forward the request to NCUA for its approval. NCUA’s Supervisory Letter lists the information needed for a waiver application, including, but not limited to, a copy of the credit union’s MBL policy, the specific waiver sought, the business need for the waiver sought, information of the credit union’s MBL history and experience, and supporting documentation.
NCUA’s Supervisory Letter also discusses criteria by which applications for a waiver will be judged. Of course, careful consideration will be given to the financial strength and consistent operating performance of the applicant. Composite CAMEL code rating and Management and Asset Quality component ratings should be 1 or 2 for the last two consecutive exams, the credit union should have a positive earnings trend and the MBL program should have been in place for at least five years and with no material deficiencies noted in the program for the last two consecutive examinations. Of course, the credit union should have strong analytics, risk management and monitoring procedures both overall and specifically within its MBL program.
The guidance also provides additional criteria depending on whether a credit union is seeking a one-time waiver or a blanket waiver.
The MBL waiver procedures become more complicated if waivers are sought for MBLs that will be participated out. In those cases, both the originating credit union and the participant credit union(s) must qualify for and obtain waivers. The originating credit union obtains a waiver if needed for the loan based both upon its qualifications and those of the borrower. The participating credit unions need approval only for their participation and not for the underlying waiver for the borrower.
Letter to Credit Unions No.: 13-CU-01 Supervisory Focus for 2013
In LTCU 13-CU-01, NCUA discusses its 2013 supervisory focus. In the coming year, NCUA examiners will focus on the following risk areas:
- Operational Risk – With respect to credit unions’ internal processes and systems, NCUA will focus on technology and internal controls risk management.
- Balance Sheet Management – NCUA will focus on the credit unions’ balance sheet maturity and risk transformation and credit union’s generation of earnings without over absorption of risk.
- Interest Rate and Liquidity Risk – In the current environment, credit unions’ mix of elevated levels of long-term assets funded by short-term, less stable funds often present a material safety and soundness risk. Examiners will evaluate how credit union balance sheets respond to stress testing scenarios. With respect to liquidity, NCUA will review contingency funding plans, particularly of those credit unions that may have relied primarily on the Central Liquidity Facility (CLF) as a sole emergency funding source. NCUA’s guidance directs credit unions to review the 2010 Interagency Policy Statement on Funding and Liquidity Risk Management and Letters to Credit Unions 00-CU-13, 01-CU-08, 03-CU-11, and 10-CU-14.
- Concentration Risk – NCUA examiners will evaluate credit unions’ diversification of assets and concentration risk mitigation strategies. The guidance encourages credit union to review Letter to Credit Unions 10-CU-03.
- Less Established Products – Credit unions investing in less established products such as private student loans or otherwise impermissible investments to fund employee benefit programs will be expected to demonstrate appropriate expertise and risk-mitigation controls over such products.
NCUA will also focus on enhancing guidance for credit unions and examiners in 2013. NCUA cites specific areas for additional guidance such as:
- Member Business Lending
- Complying with the new final rule replacing the use of credit ratings with alternative standards to assess the creditworthiness of securities and money-market instruments
- Troubled Debt Restructuring (TDR)
While examinations necessarily vary depending on each individual credit union’s risk profile and business lines, NCUA will also focus on developing a more consistent application of examination principles and procedures nationwide.. To assist credit unions in contacting NCUA and appealing examinations, NCUA has:
- Included contact information for each credit union’s supervisory examiner and assigned field examiner in the CU Online Profile
- Created a new template for the pre-examination planning letter that will include information on how to contact the NCUA examiners assigned to the examination
- Included information on exam appeal options in the Examination Report Cover Letter