(May 14, 2021) The OCC has – once again – a new leader, who said this week he would soon conduct a review of “regulatory standards” at the agency.
Michael J. Hsu was named acting comptroller of the currency late last week by Treasury Secretary Janet Yellen, who has the power to designate an acting leader of the agency until one is confirmed by the Senate. The Biden Administration has not yet nominated anyone for a full, five-year term as comptroller.
Hsu, a former Federal Reserve regulator who oversaw supervision of “global systemically important banks” (G-SIBs), becomes the fifth leader of the national bank regulator since 2017 – and the fourth “acting comptroller” over that time span. He succeeded Blake Paulson, who had been serving in an acting capacity since January (Paulson has resumed his former post of chief operating officer of the agency).
In a statement to OCC staffers on his first day on the job (Monday, May 10), Hsu said he will be announcing a “review of key regulatory standards, as well as various matters that are pending before the agency,” with the review, he said, considering a full range of views inside and outside of the agency.
Meanwhile, also this week, the Senate voted to repeal the so-called “true lender” rule, an action taken by one of Hsu’s recent “acting comptroller” predecessors. The House is expected to vote soon; President Joe Biden (D) has said he would sign the repeal measure.
Adopted by the OCC in October (and which took effect Dec. 29) by then-Acting Comptroller Brian P. Brooks (after being initially proposed in July), the rule determines when a bank is a “true lender” within the context of a partnership between it and a third party. According to the OCC, the rule specifies that a bank makes a loan and is the true lender if, as of the date of origination, it: first, is named as the lender in the loan agreement, or; second, funds the loan.
Consumer groups and others (including CSBS) have criticized the rule, saying it amounts to an “end-run” around state laws meant to prohibit predatory lending practices, such as leaving customers vulnerable to “rent-a-bank” schemes, in which an agreement is made between a bank and a third party to advance the loan – but then the bank takes over the loan once the transaction is completed.
LINKS:
Michael J. Hsu Statement to Agency Employees on Becoming Acting Comptroller of the Currency
CSBS statement on Senate passage of the CRA joint resolution to strike down OCC true lender rule
(May 14, 2021) Two significant comment letters were submitted this week by the state system, on simplification of risk-based capital requirements and on adding an “S” for sensitivity to market risk to the examination grading system.
NASCUS opposed much of the former and supported most of the latter.
On NCUA’s advanced notice of proposed rulemaking about simplification of risk-based capital (RBC) requirements, NASCUS wrote that the state system supports efforts to simplify the agency’s rules – but not necessarily by using the proposed risk-based leverage ratio (RBLR) contained in the proposal.
Under the two approaches NCUA offered for simplifying RBC requirements, the first would replace the RBC rule with the proposed RBLR (which uses relevant risk attribute thresholds to determine which complex credit unions would be required to hold additional capital buffers).
The second would keep the rule adopted in 2015 (and now scheduled to take effect at the beginning of next year) but allow eligible “complex” credit unions to opt-in to a “complex credit union leverage ratio” (CCULR) framework to meet all regulatory capital requirements. The CCULR is modeled on the “community bank leverage ratio” (CBLR) adopted by federal banking agencies in 2019, which removes requirements for calculating and reporting risk-based capital ratios for most banks with less than $10 billion in assets, more than 9% in risk-based capital, and that meet certain risk-based qualifying criteria. Banks meeting the criteria can “opt-in” to use the CBLR.
On the first approach using the RBLR, NASCUS noted several issues:
- Displacing the current RBC rule with the proposed RBLR seems premature, as there is no compelling rationale to abandon the 2015 RBC Rule at this time.
- There are limits on the merits of simplification in the context of regulating regulatory capital.
- The proposed RBLR may create a perceived conflict with the subordinated debt rule adopted by the agency in December.
- Replacing the existing RBC rule now would be disruptive and would impose significant transition costs on credit unions.
- Time is running short to develop a new and different mandatory RBC approach, especially since the RBC rule takes effect at the beginning of next year.
However, the state system does support further development of the CCULR as outlined in the second approach, NASCUS wrote. “The flexibility of parallel, complementary risk-based capital rules will allow credit unions to choose which approach is most compatible with their business model,” NASCUS wrote. “Additionally, the CCULR proposal would allow both the 2015 RBC Rule and Subordinated Debt Rules to go into effect. The optional nature of the CCULR would also permit parallel development of the new rule with the simultaneous implementation of the existing 2015 RBC rules, providing credit unions with the choice to opt-in and out of the CCULR in the future.”
NASCUS also said the “parallels between the CCULR proposal and the existing CBLR is another advantage. The regulatory and commercial experience with the CBLR can help inform the development and implementation of NCUA’s CCULR proposal.”
Finally, the association expressed support for a “thoughtful reconsideration” of issuing requirements for subordinated debt outlined in last year’s rule on that issue. Echoing its 2020 comment letter, NASCUS said rules related to subordinated debt offerings needed to be scalable to permit meaningful capital relief.
“We remain concerned that the subordinated debt rule as finalized is too prescriptive and will dampen the viability of secondary capital for low-income credit unions (LICUs),” NASCUS wrote. “Amending the 2020 subordinated debt rule to allow greater flexibility and simplified issuing requirements for certain credit unions and offerings rather than the current one-size-fits-all approach would be consistent with NCUA’s stated goal for the RBC ANPR to develop a rule that is tailored to risks, simple in structure, and avoids unnecessary regulatory burden.”
LINK:
NASCUS comment: Simplification of Risk-Based Capital Requirements
(May 14, 2021) Rules of NCUA Board procedure (including public observation of meetings), registration of residential mortgage loan originators, procedures for debt collection and post-employment restrictions for certain NCUA examiners will all be under scrutiny by NCUA this year as part of its rolling review of its regulations.
According to a list posted on the agency’s website, 12 rules will be under review in 2021. The agency has committed to completely reviewing all of its regulations every three years; it accomplishes that by covering one-third of the rules each year.
NASCUS typically files comments on the agency’s review schedule. See the link below for the complete review schedule for 2021.
LINK:
NCUA regulatory review, 2021
(May 14, 2021) Moving expeditiously on adding a “market risk sensitivity” component to the credit union examination system – that is, adding an “S” to “CAMEL” – would better align NCUA with state credit union and federal banking regulators that have already made the move, NASCUS wrote in its second significant comment letter this week.
Under a proposal issued in January, the examination rating system would be known as “CAMELS” and redefine the “L” component (for “liquidity risk”) to measure interest rate and liquidity risk more precisely. NASCUS wrote that the change is something the state system has long urged the agency to make, and the association fully supports the proposal.
While the change would align NCUA with state agencies (24 of which have adopted their own CAMELS system), and other federal regulators, NASCUS wrote, there is no need to “reinvent the wheel and develop a credit union CAMELS Rating System that diverges from the established CAMELS system currently in use in bank supervision and in the states that have adopted CAMELS for credit union supervision.” NCUA has proposed definitions and components of the criteria to be used in assigning the “S” and “L” ratings.
The state system supports implementing the CAMELS Rating System as proposed, NASCUS said, and incorporating the definitions, components, and criteria from the Uniform Financial Institutions Rating System (UFIRS), first adopted in 1997 by members of the FFIEC (with the exception of NCUA).
“Without question, the prevailing supervisory consensus is that distinguishing between the management of funds and the sensitivity to interest rate risk is a more precise and transparent method for evaluating risk.,” NASCUS wrote. “Furthermore, it is our understanding that the implementation of the CAMELS Rating System in the states where it was adopted was achieved with very little disruption to the affected credit unions and is in fact preferred by many of those same credit unions.”
NASCUS noted that adopting the revised CAMELS system will result in some costs to the agency (such as making corresponding changes throughout the agency’s rules and regulations and within agency systems and documents, as well as requiring training for examiners). “However, the benefits of measuring a credit union’s condition more precisely as well as NCUA’s aligning with its federal and state peers in adopting CAMELS far outweigh any costs,” NASCUS concluded.
LINK:
NASCUS comment: Notice of Proposed Rulemaking Regarding CAMELS Rating System
(May 14, 2021) The small-dollar loan program of the Treasury’s Community Development Financial Institution (CDFI) Fund related to credit unions is the subject of a webinar planned for May 27 by the CDFI and NCUA. The one-hour event will describe the program and discuss eligibility of permissible uses of funds through the program, NCUA said in a release. It added that credit unions that are not certified as CDFIs may still be eligible for the program through partnerships with CDFIs or any federally insured depository institution whose primary mission is serving targeted investment areas … Federal financial institution regulators – including NCUA (likely Board Chairman Todd Harper) — are due to testify next Wednesday (May 19) before the House Financial Services Committee in an oversight hearing; the session gets underway at 10 a.m. (and will be streamed, live, via the Internet) … Credit union and banking trade associations this week wrote in opposition to legislation aimed at reversing a Supreme Court decision clarifying that a business engaged in non-judicial foreclosure proceedings is not a debt collector. The Non-Judicial Foreclosure Debt Collection Clarification Act (H.R. 2547), a bill that would reverse the 2019 decision in Obduskey v. McCarthy and Holthus LLP, which clarified that entities enforcing a security interest, without also seeking repayment or deficiency judgement, generally do not qualify as debt collectors under the Fair Debt Collection Practices Act (FDCPA). The groups contend that the bill would “disrupt the choices states have made in structuring their foreclosure regimes, imposing unnecessary costs and delay to the enforcement of real property interests and subsequently increasing the cost of credit.”
LINKS:
NCUA, CDFI Fund to Cohost Webinar on Small-Dollar Loan Program
(May 14, 2021) If you were one of the unfortunate but countless number of folks sitting in line at the gas pumps this week – wondering “what can I do to stop this?” – consider the NASCUS Cybersecurity eSchool (in partnership with CUNA) set for Sept. 3 to Nov. 9.
The hacking and ransomware attack on the Colonial Pipeline – which disrupted gasoline delivery to stations up and down the East Coast, leading to panic buying and long lines – has underscored the need for cybersecurity preparation and protection, according to many experts.
Aimed at anyone at credit unions and regulators needing cybersecurity training, the Cybersecurity eSchool multi-week program includes sessions on: anatomy of a ransomware attack; cybersecurity strategy, developing and strengthening an information security policy; building staff and board awareness; threat hunting; security frameworks and more.
For more information, including the agenda and registration, see the link below.
Also: This week NCUA and the Cybersecurity and Infrastructure Agency (CISA) scheduled a May 26 one-hour webinar (at 2 p.m.), for credit unions on preventing and addressing cyberattacks. NCUA said the session will focus on (among other things) Identifying risks to products, services, and assets and monitoring the security of networks.
LINKS:
NASCUS Cybersecurity eSchool, in Partnership with CUNA
Registration Now Open for NCUA, CISA Cybersecurity Webinar
(May 14, 2021) Whether share insurance applies to a credit union share certificate purchased by a limited liability corporation (LLC) depends in part on who owns the funds and whether the LLC is engaged in an “independent activity” other than one solely related to increasing share insurance coverage, NCUA wrote in an April 23 legal opinion letter, but only made public this week.
The letter, addressing “Proposed Capital Markets Funding Program for Credit Unions” and signed by NCUA General Counsel Frank Kressman, summarizes a scenario in which several LLCs purchase share certificates worth a maximum of $250,000, the “standard maximum share insurance amount” (SMSIA) permitted by NCUA’s share insurance regulations, at federally insured credit unions (FICUs) where they are members or are eligible to be members. The letter states that each LLC would be the actual owner of the share certificates they purchase and would not be holding them in any sort of agent, nominee, or custodian capacity.
The NCUA general counsel wrote that share insurance coverage is provided “only to the actual owner of the funds in an account and requires the true owner of the funds to either be a member of the FICU or otherwise eligible to maintain an insured account at the FICU.”
Additionally, he wrote that the accounts held by a corporation, partnership, or unincorporated association “engaged in any activity other than one directed solely at increasing insurance coverage (that is, an ‘independent activity’) will be insured up to the SMSIA in the aggregate.”
Emphasizing the requirement for ownership of funds, the letter adds that share insurance coverage “is always dependent upon compliance with all applicable requirements of Part 745, including the recordkeeping requirements in § 745.2(c)” of the agency’s rules.
The opinion was sent to Stuart Morrissy of Hogan Lovells US LLP in Washington, D.C.
LINK:
NCUA legal opinion – Proposed Capital Markets Funding Program for Credit Unions
(May 14, 2021) A final rule on investments in derivatives by credit unions, and two items that could have a significant impact on a savings insurance premium for credit unions, are all on the agenda for the NCUA Board when it meets on Thursday.
The final rule on derivatives follows up on a proposal from the agency issued in October, which was designed to make current regulations less prescriptive and more principles-based. The proposal would also expand federal credit unions’ (FCUs) authority to purchase and use derivatives as part of their interest-rate risk (IRR) management.
NASCUS, in its comment letter on the proposal filed with the agency in late December, said the state system supports the proposal, but made two recommendations to make the rule more flexible for the needs of state credit unions. First, NASCUS said the agency should eliminate redundant supervisory notice requirements where applicable. NCUA, the association wrote, should provide an exemption from its notice requirement for FISCUs in states where pre-approval or pre-notification is required to be given to the state regulator.
Second, NASCUS wrote that the agency should incorporate exempt derivatives transactions directly into part 741.219 of its rules – the section that covers FISCUs and investment requirements. Specifically, NASCUS “strongly recommended” that — to facilitate FISCU compliance – the agency should incorporate the excluded transactions under the proposal (under part 703.14 of NCUA rules, which only apply to FCUs) directly into a new subpart (d) of section 741.219. Restating the excluded transactions directly in the relevant FISCU rule, NASCUS wrote, “is a better organizational framework that more clearly communicates to FISCUs the required compliance obligations.”
NASCUS also acknowledged in its letter that a key part of the proposal is continued recognition by NCUA of the primacy of state law in determining investment authority for FISCUs.
Regarding the insurance fund and the future of a premium, the NCUA Board will also consider at next week’s meeting:
- Issuing a comment request on the National Credit Union Share Insurance Fund’s (NCUSIF) “normal operating level” (NOL), which is the reserve level at which the board has determined the fund can adequately cover any losses presented to the fund. The NOL plays a key role in determining whether a premium will be charged to credit unions to bolster the fund’s reserves. The subject of a premium has been the focus recently of considerable discussion. However, NCUA Board Chairman Todd Harper has repeatedly said the question is increasingly not if, but when, a premium will be charged. Separately (but related): In September, the FDIC Board adopted a restoration plan for the agency’s Deposit Insurance Fund (DIF) which — much like the NCUSIF — had been diluted by the massive influx of savings as a result of the financial impact of the coronavirus crisis. The FDIC plan would restore the fund’s reserve ratio to at least 1.35% of reserves to total insured funds within eight years, as required under federal law — but would require no “extraordinary measures” – such as increasing assessment rates. Instead, the agency said last fall that it would, over the next eight years: monitor deposit balance trends, potential losses, and other factors that affect the reserve ratio; maintain the current schedule of assessment rates for insured banks and other institutions; and provide updates to its loss and income projections at least semiannually.
- A quarterly report on the NCUSIF, which should include details on the latest equity level of the fund, which also has an impact on a future premium. Lately, the equity level (the amount of total reserves in the fund relative to total savings insured) has been dropping as insured savings have been growing, spurred by member deposits of federal stimulus payments and other savings. Federal law requires that if the NCUSIF equity ratio drops below 1.2%, the board must adopt a “restoration plan” to bring the equity ratio back up to the fund NOL – including a premium. The insurance fund closed 2020 with an equity level of 1.26%, well below the current NOL of 1.38% (but an improvement from earlier in the year when the equity level stood at just 1.22%).
The board meeting gets underway at 10 a.m. ET; audio of the meeting will be live-streamed via the Internet.
LINK:
NCUA Board meeting agenda, May 20
(May 14, 2021) NCUA is encouraging credit unions to participate in a May 24 webinar explaining (and answering questions about) the U.S. Treasury’s Emergency Capital Investment Program (ECIP), which has extended its application period to July 6.
The 75-minute webinar, “An Overview of the Emergency Capital Investment Program,” will be held at 3 p.m. ET, the agency said in a release.
The ECIP was established under the Consolidated Appropriations Act, 2021. Under the program, Treasury provides up to $9 billion in capital directly to credit unions and other depository institutions that are certified community development financial institutions (CDFIs) or minority depository institutions (MDIs). The funding may be used to provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers – especially those in low-income and underserved communities – that may be disproportionately impacted by the economic effects of the COVID-19 pandemic.
Treasury says it will set aside $2 billion for CDFIs and MDIs with less than $500 million in assets and an additional $2 billion for CDFIs and MDIs with less than $2 billion in assets.
NCUA Board Chairman Harper has repeatedly encouraged credit unions to learn more about the program.
Registration for the webinar is open; participants may submit questions in advance by email at [email protected]; questions submitted by May 18 will receive priority, NCUA said.
LINKS:
Federal Financial Regulators to Hold Webinar on Emergency Capital Investment Program