(Dec. 17, 2021) NASCUS’ Ito acknowledged the agency’s efforts. “We commend the board for its thoughtful and unprecedented consideration of stakeholder feedback in finalizing the agency’s 2022 budget. On behalf of state credit union regulators and credit unions, NASCUS appreciates the downward adjustment of the 2022 proposed overhead transfer rate from 63.4% to 62.7%,” she said.
However, she asserted that the state system remains concerned about the underlying structural issues that dictate the calculation of the OTR and the federal credit union operating fee (see item below).
Finally, Ito said the state system also values the NCUA Board and staff commitment to providing more detailed explanations of new staff positions as well as clarifications in the budget justification related to state examiner equipment expenses and the payment of supervisory fees by state credit unions to their respective state regulators. “NASCUS and the state system look forward to continued open dialogue with our NCUA partners on how, together, we can assure both the safety and soundness of credit unions and the ongoing vitality of the dual charter credit union framework,” she said.
(Dec. 17, 2021) The “normal operating level” (NOL) of the NCUSIF – the level at which NCUA considers whether it needs to inject more reserves into the fund to cover looming losses, primarily through premiums – was set at 1.33% by the agency board Thursday. The decision was made after the agency dropped two of eight factors it uses to set the NOL as “no longer necessary” (the modeled potential decline in value of the NCUSIF’s claims on the corporate asset management estates; and to account for a potential projected equity ratio decline through the end of the following year without an economic downturn) … Robert (“Rob”) Schmidt is the new director of the Alaska Division of Banking and Securities; he succeeds James McConnell who left in October … The OCC finalized rescission of its 2020 rule implementing the Community Reinvestment Act (CRA), reverting agency rules to those adopted in 1995 and followed by its fellow federal banking regulators. The 2020 CRA rule was rescinded, the OCC said, to “facilitate the ongoing interagency work to modernize the CRA regulatory framework and promote consistency for all insured depository institutions.”
LINK:
Share Insurance Fund 2022 Normal Operating Level
(Dec. 17, 2021) Self-testing of credit unions’ cybersecurity preparedness through an application released in October costs nothing and can be downloaded via NCUA’s website, the agency said in a letter this week to federally insured credit unions.
The Automated Cybersecurity Evaluation Toolbox (ACET) was created to help credit unions conduct a maturity assessment that aligns with the Federal Financial Information Council’s (FFIEC) Cybersecurity Assessment Tool, NCUA said in letter 21-CU-15, signed by agency board Chairman Todd Harper. It said the toolbox can be used by institutions of all sizes and complexity to determine and measure their information and cybersecurity preparedness against several industry standards and best practices.
The agency said the assessment incorporates cybersecurity standards and practices established for financial institutions: It includes practices found in the FFIEC IT Examination Handbooks, regulatory guidance, and leading industry standards like the National Institute of Standards and Technology (NIST) Cybersecurity Framework.
“While we highly encourage the use and implementation of the maturity assessment for a credit union to determine its information and cybersecurity preparedness level, it is only a self-assessment,” according to the letter. “Credit unions are not required to use the Toolbox or complete the maturity assessment. However, it can provide insight into additional steps a credit union may consider taking to strengthen its overall security posture.”
LINK:
(Dec. 17, 2021) A final regulation tweaking the agency’s subordinated debt rule by amending the definition of “Grandfathered Secondary Capital” to include any secondary capital issued to U.S. government or one of its subdivisions under an application approved before January 1, 2022, irrespective of the date of issuance, was also approved by the board.
NCUA said the change will benefit eligible low-income credit unions that are either participating in the Treasury Department’s “Emergency Capital Investment Program” (ECIP) or other programs administered by the federal government that can be used to fund secondary capital, “if they do not receive the funds for such programs by Dec. 31.”
The final rule also provides that the expiration of regulatory capital treatment for these issuances is the later of 20 years from the date of issuance or Jan. 1, 2042.
NASCUS, in its comment letter on the proposal (submitted in October) recommended that “a basic sunset provision could provide compatibility between the Subordinated Debt rule and the rules of qualifying government funding program.”
LINK:
Final Rule, Parts 702 and 741, Subordinated Debt
NASCUS comment: Subordinated Debt 2021
(Dec. 17, 2021) NCUA’s fall rule agenda was published late last week, along with other agencies (see item on CFPB), with 21 projects listed, 14 of them in “final rule stage.”
Among the key items of both proposed and final rules:
- A proposed rule on compensation in connection with loans to members and lines of credit to members, following up on a request for comment issued in 2019. The agency expects action this spring.
- A notice of proposed rulemaking by this summer on decentralized finance and cryptocurrencies as they relate to the credit union industry, following up on a request for information (RFI) issued in July.
- A final rule on “combination transactions” (also known as credit union purchases of banks), perhaps as early as February, to “establish requirements related to transactions where a federally insured credit union (FICU) proposes to assume liabilities from an institution other than a credit union.” The agency issued a proposal early this year.
- Another final rule to amend the agency’s procedures on “suspicious activity reports” (SARs) to allow the agency to issue exemptions from those requirements to provide relief to federally insured credit unions (FICUs) that develop innovative solutions to meet the requirements of the Bank Secrecy Act (BSA). The final follows a proposal issued in January.
LINK:
NCUA Fall ’21 rulemaking agenda
(Dec. 17, 2021) Kentucky Department of Financial Institutions Commissioner Charles Vice (and NASCUS Regulator Board director) welcomes participants to the Dec. 14 Kentucky Credit Union Directors’ College in Louisville. The one-day session looked at BSA requirements, cybersecurity, succession planning, interest rate risk, national issues, and more. The event – a sellout for in-person attendance — was co-sponsored by the Kentucky DFI and NASCUS.
(Dec. 17, 2021) Finally, the board also approved a change to its investment regulation to allow FCUs to purchase mortgage servicing rights (MSRs) from other federally insured credit unions (FICUs, including states), under certain conditions.
Under the final rule, FCUs with a CAMEL or CAMELS composite rating of 1 or 2, including a “management” component rating of 1 or 2, may purchase the mortgage servicing rights of loans from FICUs, provided that: 1) the underlying mortgage loans of the assets are loans the FCU is otherwise empowered to grant; 2) the purchase will be made in accordance with the FCU’s written policies that address the risk of these investments and servicing practices; and 3) the FCU’s board of directors or investment committee approves the purchase in advance.
NCUA cited comments submitted during the comment period that “strongly recommended” NCUA work with state regulators to address supervisory concerns regarding mortgage servicing rights in a manner that “does less harm to the dual chartering system, more effectively mitigates material risk, and improves oversight while not unnecessarily burdening credit unions.”
In the commentary of its final rule, NCUA noted that the final rule only applies to FCUs by removing its previous prohibition against purchases of MSRs. “It is not apparent to the Board that state laws applicable to FISCUs widely provide for similar investment authority, although most state regulators can grant parity for state-chartered credit unions so those institutions may engage in the same activities authorized for FCUs,” NCUA wrote. “Further, to the extent that FISCUs engage in the purchase of MSAs from other parties, the conditions on these assets under the RBC requirements in part 702 apply to all complex federally insured credit unions.”
The agency vowed to monitor such activity in state-charted, federally insured CUs and “will consider whether to extend § 703.14(l) to FISCUs under part 741, subpart B, if necessary.” The agency also noted its commitment to “continued communications with state regulators to address supervisory concerns, including those related to MSAs.”
LINK:
Final Rule, Part 703, Mortgage Servicing Assets
(Dec. 17, 2021) Kelly Lay is the new top examination executive for NCUA, the agency said this week replacing the retiring top staffer at the start of the year.
The agency said Lay, who replaces Myra Toeppe as NCUA Office of Examination & Insurance director, is a 25-year veteran of the agency. She has served as an examiner, supervision analyst, director of supervision and insurance in regional offices, and was associate director of programs for the agency’s region II. She takes over as office director on Jan. 1.
The agency said she was “also instrumental in guiding the development of the NCUA’s new examination system, the Modern Examination & Risk Identification Tool” (MERIT). She holds a BS (finance) from Illinois State University, and earned a certified public accountant (CPA) certification in Illinois in 2002.
Toeppe is retiring after more than 10 years at the agency and 34 years of public service, including at other federal financial institution regulators.
The examination and insurance office for the agency oversees exams and supervision of federally insured credit unions, as well as managing risk for the National Credit Union Share Insurance Fund (NCUSIF), which insures credit union members’ savings.
LINK:
Kelly Lay Named Director of the Office of Examination and Insurance
(Dec. 17, 2021) A final rule adopting an “off ramp” from risk-based capital (RBC) requirements for complex credit unions will take effect Jan. 1 after unanimous action by the NCUA Board Thursday.
The regulations include several changes from the proposal issued in July: It adopts a 9% complex credit union leverage ratio (CCULR), permanently grandfathering excluded supervisory goodwill from the deduction in the risk-based capital numerator, and excluding grandfathered supervisory goodwill from the goodwill qualifying criteria for the CCULR framework.
It applies to federally insured, natural-person credit unions classified as “complex” (those with total assets greater than $500 million).
Designed to provide a simplified measure of capital adequacy (like that provided by federal banking regulators under the community bank leverage ratio, CBLR), qualifying credit unions that maintain the 9% minimum net worth ratio (and meet other qualifying criteria) are allowed to “opt into” the CCULR framework. Once it does that, NCUA said, an eligible credit union need not calculate a risk-based capital ratio under the NCUA Board’s risk-based capital final rule.
Further, a qualifying complex credit union that opts into the CCULR framework and maintains the minimum net worth ratio is considered well capitalized, NCUA said.
The CCULR surfaced in July with a proposal to make a simplified measure of capital adequacy available to federally insured credit unions defined as “complex” – meaning those with more than $500 million in assets. It was inspired by the bank CBLR that went into effect in January 2020 for banks under the 2018 financial regulatory relief law. That rule allows banks to hold a certain, uniform level of capital (now at 9% of assets) as long as they meet certain conditions, including in lending and investments.
The 9% requirement is repeated in the new NCUA rule; a provision included in the proposal that the rate would rise gradually to 10% by Jan. 1, 2024 was dropped from the final rule.
In its October comment letter, NASCUS wrote that the state system supports the CCULR, as well as a quick implementation of a final regulation. However, the state system suggested that: subordinated debt should be permitted in calculating net worth for CCULR thresholds; complex credit unions of all sizes can appropriately manage the optionality of both entering and exiting the CCULR; and changes are needed to the current (and proposed) risk-based capital (RBC) and subordinated debt rules in order to avoid a “chilling effect” on the low-income credit union (LICU) secondary capital system.
NCUA took a pass on including subordinated debt in calculating net worth for CCULR thresholds. The agency argued that subordinated debt can be an expensive form of capital, both in the terms of the cost of issuing it and in terms of necessary rate of return to investors. Also, the agency said, the capital form it may not be readily available during times of stress.
It also declined to make any additional changes, for now, to the existing sub debt and RBC rules. “The Board will separately monitor implementation of the subordinated rule and consider any appropriate changes in the future, the agency wrote. The final rule also made no changes to the opt-in procedures.
LINKS:
Final Rule, Parts 702 and 703, Complex Credit Union Leverage Ratio
(Dec. 17, 2021) Meanwhile, the board also approved a $320.1 million operating budget that was $6 million less than that proposed. To reach that lower level, the agency also cut 46 full-time equivalent (FTE) positions that were proposed last month. For next year, the agency will carry 1,196 FTEs.
However: the board also decided to reduce the amount that federal credit unions (FCUs) pay to fund the remainder of the NCUA operating budget (the OTR will fund 62.7% of the agency operations, the FCU operating fee 37.3%). The agency is doing that by crediting to FCUs $15 million from “accumulated cash in excess of funding needs.” As a result, on average, in 2022 FCUs will pay approximately 24% less than they paid NCUA in 2021.
The agency said there the $15 million credit (from the agency’s operating fund), represents past-year, unspent operating fee cash collections “the NCUA does not currently require.” “It is important to note that the OTR is billed throughout the year for actual expenses, so there are not excess funds collected that can be ‘returned’ at the end of each year,” NCUA explained. However, as NASCUS has previously argued, a problem with the OTR and budgeting process is that, once the OTR is set, there is no reconciliation to affirm or correct the workload analysis assumptions that drive the OTR calculation, itself.
As another point in explaining the credit for the operating fee, the agency also said that, based on call report data through Sept. 30, average asset growth is calculated at 16.3%, an increase of approximately 200 basis points from the 14.3% projected asset growth included in the draft budget.
The decrease in the operating fee is 23.7% compared to 2021, NCUA said, adding that it is also “a 1,250 basis point reduction from the estimate provided in the staff (budget) draft.”
(Dec. 17, 2021) An increased overhead transfer rate (OTR) for 2022, a final operating budget of $320 million for next year, and three final rules – on the complex credit union leverage ratio (CCULR), subordinated debt and mortgage servicing assets — were all approved by the NCUA Board at a busy meeting this week.
All actions by the board (including new rules, see items) were approved unanimously.
In a U-turn, the board voted to reduce the staff-proposed OTR, but it is still higher than the last two years.
The board gave the nod to a 62.7% OTR to partially fund its 2022 budget of $320.1 million. The board’s action on the OTR, which represents the rate at which funds are transferred from the National Credit Union Share Insurance Fund (NCUSIF) to pay for “insurance related” expenses of the agency, is the third straight year that the rate has been raised (at 40 basis points higher than 2021, and 140 bp higher than 2020).
Although the OTR is higher again for 2022, the figure the board ultimately approved was lower than that proposed last month when the budget was unveiled. Originally, the agency recommended a 63.4% rate.
As recently as last week, during the agency’s briefing and public comment on its 2022 budget, NASCUS asserted that every dollar that is transferred from the insurance fund to fund NCUA expenses is one dollar not available to cover losses in the system, and subsequently a dollar that may need to be replenished in the NCUSIF by the charging of a premium.
NASCUS also urged the agency to do a more complete job in explaining how and why the OTR changes from year to year. “Credit unions should also be interested in what additional costs NCUA is now covering with NCUSIF dollars,” NASCUS President and CEO Lucy Ito said in prepared comments for last week’s briefing. In that regard, she was repeating the view of the state system that the agency needs to do better in communicating what goes into the OTR.
In response, NCUA indicated it is listening. “The NCUA will also look to provide better explanation for the drivers behind the year-over-year OTR changes in budget documents going forward, rather than just reporting on the level of the change,” agency staff said in background materials submitted for this week’s board meeting.
LINK:
NCUA’s 2022-2023 Budget: Board Action memorandum
(Dec. 17, 2021) Six regulatory activities in 2022 by CFPB have been identified by the agency as “key” actions, according to a rulemaking agency released Monday – but action on overdraft fees was not one of them.
The bureau said the list of matters the agency plans to pursue from now through Oct. 31 of next year “reflects the continuation of significant rulemakings that further our consumer financial protection mission and help to advance the country’s economic recovery from the financial crisis related to the COVID-19 pandemic.”
The key actions, the agency said are:
- Small Business Lending Data Collection
- Availability of electronic consumer financial account data
- Property Assessed Clean Energy (PACE) Financing
- Standards for Automated Valuation Models (AVMs)
- Facilitating transition away from LIBOR Index
- Reviewing existing regulations and market monitoring
Conspicuously missing from the list of “key actions” is anything new on regulating overdraft fees at banks and credit unions. Two weeks ago, the agency signaled it would be acting on the fees with the aim, it said, of restoring “meaningful competition.” The bureau also said it would be enhancing its supervisory and enforcement scrutiny of banks that are heavily dependent on overdraft fees. “In recent years, the CFPB ordered TD Bank to pay $122 million in penalties and customer restitution, and ordered TCF Bank to pay $30 million in penalties and restitution,” the agency noted.
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