(May 28, 2021) Comment letters on NCUA’s interim final rules on asset thresholds for reporting purposes, and for conforming existing NCUA’s Central Liquidity Facility rules with new statutes, were submitted by NASCUS this week. The state system supported both interim rules.
Under the asset threshold rule, NCUA set March 31, 2020, as the date for determining the applicability of regulatory asset thresholds for such things as capital planning and stress testing at larger credit unions for the remainder of this year and all of next. The new rule affects about 10 large credit unions, NCUA said in March when it issued the interim rule, including those with state charters. It is meant to mitigate the impact of the influx of savings to credit unions, particularly larger ones, during the coronavirus crisis, according to the agency.
Even though it was an interim final rule, NCUA called for comments, which NASCUS and others supplied by this week’s deadline. NASCUS wrote that the March 31, 2020 date is an appropriate measurement date to use. “Many credit unions have experienced a surge in deposits during the pandemic and some level of post-pandemic run-off is expected,” NASCUS wrote. “Utilizing March 2020 data is a practical way to avoid subjecting credit unions to the additional compliance costs associated with the stress testing tiers that would, but for the pandemic inflation of their balance sheets, not otherwise have qualified for stress testing under Part 702 (of NCUA rules) at this time.
“Under the IFR, NCUA would only use the March 31, 2020 date to determine whether a credit union qualifies for stress testing and capital planning in 2022. We agree that providing this regulatory relief initially for one year is a prudently measured approach,” NASCUS told NCUA.
The second letter looks at the agency final interim rule updating its regulations for the agency’s Central Liquidity Facility (CLF). The changes grew out of the passage in December of the Consolidated Appropriations Act, 2021. That legislation extended several enhancements to the CLF (such as more flexible memberships) made in last year’s Coronavirus Aid, Relief, and Economic Security (CARES) Act. The new rule amends the NCUA’s CLF regulation to reflect these extensions. NCUA also sought comments (even though the rule is already in effect).
The state system told the federal regulator that it supports the interim rule, and noted that NCUA should “interpret its own authority broadly to make as many of the CLF changes permanent that it can and seek Congressional action for other changes as needed.
“A more flexible, responsive, and robust CLF is good for the credit union system,” NASCUS wrote. “It is also sound public policy.”
LINKS:
NASCUS Comments: Interim final rule, asset thresholds
NASCUS Comments: Interim final rule, Central Liquidity Facility
(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) 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 7, 2021) State regulators must have access to the same “beneficial ownership” information that federal agencies will have under legislation adopted last year, and made available through a database, NASCUS wrote in a comment to FinCEN submitted this week.
In response to an advance notice of proposed rulemaking (ANPR) issued early last month, NASCUS wrote that to “maintain a seamless and effective oversight of the BSA/AML, FinCEN must include state regulators in the implementation of the Corporate Transparency Act (CTA) to the same extent as federal agencies.”
The CTA, adopted as part of last year’s National Defense Authorization Act (NDAA), allows that the beneficial ownership information submitted to FinCEN may be disclosed to financial institutions (including credit unions) in their compliance with BSA/AML customer due diligence (CDD) requirements. “Beneficial owners” are those individual natural persons who ultimately own or control the reporting companies.
The state system said it supports strengthening the Bank Secrecy Act/anti-money laundering (BSA/AML) framework, and will work with FinCEN as the beneficial ownership database is developed and the CTA implemented. However, NASCUS urged FinCEN to develop a database that reduces information and collection verification burden on credit unions.
“Credit unions and other financial institutions already bear a substantial BSA/AML regulatory burden to safeguard the financial system and work diligently to fulfill their responsibilities,” NASCUS wrote. “Designing the Beneficial Ownership Database in a manner that eases related customer due diligence requirements would allow financial institutions to re-allocate resources to monitoring and other BSA/AML obligations resulting in a more secure financial system.”
LINK:
Comment: Beneficial Ownership Information Reporting Requirements
(May 7, 2021) Possible, additional reporting requirements for state credit unions because of a proposed new rule on credit union service organizations (CUSOs) is a key concern outlined by the state system in its comment letter submitted to NCUA late last week on the proposal.
Overall, the proposal would expand the list of permissible activities for a federal credit union (FCU) CUSO and reserve authority for the NCUA Board to approve additional activities without the traditional notice and comment. Typically, NASCUS wrote, the association does not weigh in on proposals that affect, directly at least, only federal credit unions. However, because this proposal could influence state credit unions considering collaborating with FCU investors in the formation and ownership of a CUSO, the association was prompted to comment.
In some states, NASCUS pointed out, CUSOs owned by state credit unions already hold expanded lending power. The association noted, however, that the NCUA proposal could end up requiring additional reporting requirements that don’t today exist for SCUs. “NASCUS opposes extension of any additional reporting requirements to SCU CUSOs resulting from an expansion of FCU powers,” the association wrote.
NASCUS reminded the agency that SCU CUSOs may now provide many products and services authorized under state law free of restrictions in place for FCU CUSOs – and, in some cases, states already have the authority NCUA is proposing now for FCU CUSOs.
“To date, NCUA, the (National Credit Union) share insurance fund, and the credit union system have been able to manage any risk presented by SCU CUSOs within the existing reporting framework pursuant to existing Part 741.12” of NCUA regulations, NASCUS wrote. The association wrote that nothing in the proposal identifies a pressing need to include SCU CUSOs in any new reporting requirements and “we expect that should NCUA seek to include ALL CUSOs in any reporting requirements the agency would consult with the state regulators and subject proposed SCU CUSO reporting requirements to notice and comment.”
In other comments, NASCUS recommended that the agency:
- allow a limited amount of FCU investment in an SCU CUSO without triggering agency limitations on the state CUSO;
- continue to evaluate prudent changes that enhance a credit union’s ability to serve members and meaningfully engage in the marketplace, after asserting that “collaborating with a CUSO should not be a necessity in order for a credit union to remain vibrant and healthy.”
- permit FCUs to invest with banks, which would be consistent with the state system’s view of the need for greater flexibility for credit union investment.
- continue to work with NASCUS and state regulators to leverage state supervisory oversight of CUSOs and third-party service providers as needed to address any supervisory uncertainty NCUA may have related to any SCU CUSO or other third-party entity.
LINK:
Comment: Proposed Rule, Credit Union Service Organizations (CUSOs) – RIN 3133–AE95
(March 26, 2021) The state system supports raising the asset threshold to $500 million for defining a credit union as “complex” under risk-based net worth (RBNW) requirements, citing the benefit the move would accrue for both credit unions and their members.
In a comment letter filed this week with NCUA, NASCUS wrote that it concurred with NCUA over raising the threshold from $50 million to $500 million, stating that the action would not result in a material increase in risk the National Credit Union Share Insurance Fund (NCUSIF). Beyond that, NASCUS wrote, the benefit of the regulatory relief provided by the threshold change for both credit unions and their members “outweighs any nominal increase in risk.”
“NCUA provides a compelling case in the Supplemental Material for raising the asset threshold,” NASCUS wrote. “We note the fact that the proposed change would provide relief to 1,737 federally insured credit unions (FICUs) while maintaining coverage of over 81% of assets held by FICUs.”
In January, the NCUA Board proposed (on a vote of 2-1, with now-Chairman Todd Harper dissenting) to propose the rule raising the asset threshold. The board noted then the difficulties posed by the ongoing COVID-19 pandemic, and said the proposal is aimed at providing a measure of regulatory relief to further encourage credit unions to ensure access to credit and other services.
NASCUS acknowledged in its comment letter that while an overwhelming majority of credit union assets would still be covered under the RBNW provisions, more modestly sized credit unions would be able to refocus on responding to the financial impact of the pandemic and serving their membership.
Additionally, NASCUS wrote, it makes sense to cohere the current threshold now to the threshold taking effect Jan. 1 under the 2015 Risk-Based Capital Rule (2015 RBC Final Rule).
“The question before us is what regulatory and supervisory sense is there for maintaining a $50 million threshold for the remaining nine months of 2021 given the limited risk mitigation utility maintaining a low threshold provides? We see little benefit to maintaining the existing threshold as an interim benchmark,” NASCUS stated.
(March 12, 2021) Clear communication to federally insured state credit unions (FISCUs) of which regulations do and do not apply to them – and also providing a clear chain of regulatory citations applicable to any given issue being communicated – are among the recommendations NASCUS made this week to NCUA about its communications and transparency.
In a comment letter on the agency’s requestion for information (RFI) about its communications practices, NASCUS placed strong emphasis on how the agency communicates information about regulation and compliance relevant to the state system. NASCUS wrote that, often, the agency’s communications “fall short in clearly communicating to FISCUs what applies and how.”
The association pointed to NCUA’s annual (and recent) regulatory review, which identifies provisions of agency rules under review – but without identifying to FISCUs which of those provisions apply. Another example, NASCUS stated, was a May 2020, NCUA Letter to Credit Unions (20-CU-16, “Low-Income Designations: Qualifications of Military Personnel”). NASCUS noted that the communication cites the agency’s low-income designation rule, 12 C.F.R 701.34, but fails to provide FISCUs the corresponding citation applying that provision to state credit unions (12 C.F.R 741.204).
“There is simply no reasonable justification for preserving an organizational framework for compliance guidance that requires FISCUs to spend time searching through the regulations to determine if the information being evaluated applies to them and how it applies to them,” NASCUS wrote.
In order to clearly communicate compliance obligations, the association urged NCUA to reorganize its regulations to consolidate all rules applicable to FISCUs, a long-standing goal of the state system. NASCUS stated that doing so would “much more clearly communicate compliance obligations and reduce the regulatory burden of FISCUs constantly having to search through dozens of NCUA rules to identify references to rules that apply to them.”
NASCUS also recommended that all NCUA communications applicable to FISCUs should contain all relevant regulatory and statutory citations, including the reference to Part 741 of NCUA’s rules that applies the subject matter of NCUA communications to FISCUs. “Going forward there should never be an NCUA compliance communication applicable to FISCUs that does not contain a reference to Part 741,” NASCUS wrote.
In other comments, NASCUS recommended:
- The agency maintain a list of interagency statements and guidance on the NCUA.gov website where other regulatory and supervisory guidance is presented, rather than only as a press release or a “letter to credit unions.”
- On credit union mergers and conversions, that the agency provide both an individual transaction data set as well as systemic data (as was done prior to 2018). “The aggregate systemic data is valuable to stakeholders thinking strategically about the effect and implications of trends in consolidation and charter conversion on the system as a whole,” NASCUS wrote.
- Creation of a dedicated page on the agency website to provide information for de novo state credit unions seeking to apply for federal share insurance (and referred the agency to the FDIC website (FDIC.gov) for an example of a deposit/share insurance application page). Additionally, NASCUS recommended, the agency should provide a link to NASCUS for parties seeking information on conversion to a credit union charter. “NASCUS can provide additional information and contacts for state regulators were NCUA to provide a link to NASCUS,” the association wrote. “Providing a link to NASCUS for additional information would be similar to NCUA’s webpage dedicated to Financial Literacy and Education which provides helpful links to various non-profits dedicated to financial literacy.”
- Clarification by the agency of what publications and guidance can be expected to be communicated by way of the “NCUA Express,” an e-mail information delivery service of the agency. “NASCUS has experienced an intermittent inconsistency in receipt of email communications from that otherwise excellent service resulting in our resubmitting credentials from time to time,” NASCUS stated. “In addition to the interruption in receipt of notices, NCUA Express does not always appear consistent in communicating all guidance documents issued and published on NCUA.gov. For example, NCUA Legal Opinions are not communicated by way of this platform.”
- More clear delineation between data for FISCUs and FCUs.
LINK:
NASCUS comment letter: NCUA RFI on communications and transparency
(Feb. 5, 2021) A proposed rule allowing credit unions to capitalize interest should be finalized “expeditiously,” NASCUS said in a comment letter to NCUA this week, noting its support for the rule.
“We have no doubt credit unions will exercise the ability to capitalize interest to the benefit of members in need and are confident in the ability of state examiners to provide supervisory oversight of loan workouts and modifications,” NASCUS wrote.
The comment letter was filed in response to the NCUA Board’s proposal issued Nov. 19., the board suggested, in issuing the proposal, that continuing to prohibit the authorization of additional advances to finance unpaid interest may be overly burdensome. Removing the prohibition, the board asserted, would “assist a federally insured credit union’s good-faith efforts to engage in loan workouts with borrowers facing difficulty because of the economic disruption that the COVID- 19 event has caused.”
NASCUS agreed, writing its comment letter that finalizing the proposal would provide credit unions’ greater flexibility to work with economically distressed members. “That enhanced flexibility benefits distressed credit union borrowers by expanding the options for repayment programs as the member regains their economic footing,” NASCUS wrote. “Concurrently, provisions of the rule protecting the best interests of the borrower provide consumer protection guardrails that protect against the unlikely chance that a credit union engages in unfair lending practices.”
The state system made one recommendation through the NASCUS letter: that the agency reconsider the blanket prohibition contained in the proposal against additional advances to cover credit union fees and provide credit unions the full range of options for managing and structuring loan work outs as other depository institutions.
“Credit unions have both the ability and integrity to balance the interests of the credit union, distressed borrowers, and other members,” NASCUS wrote.
(Jan. 8, 2021) The state credit union system supports NCUA’s efforts to clarify how it will treat supervisory guidance issued by the agency in the context of examination and supervision, NASCUS said in a comment letter filed with NCUA Monday.
However, NASCUS also urged the agency in the letter to coordinate with state agencies as it implements a final rule, and to consider incorporating definitions of covered guidance into the final rule.
NASCUS was commenting on a proposal issued by NCUA in October aimed at clarifying and codifying the role of supervisory guidance. In doing so, the agency joined with other federal financial institution regulators who had earlier issued the same proposal for the institutions they supervise.
Under the proposal, the meaning of “supervisory guidance” would be clarified as meaning, essentially, it doesn’t have the force of law. If finalized, it would codify an interagency statement issued by all of the agencies in September 2018. That statement was intended to make clear that, unlike a statute or regulation, supervisory guidance is not the same as statute or regulation. “Supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance,” the 2018 statement read.
In its comment, NASCUS said the state system supports the proposal, but also made some recommendations, including:
- NCUA should coordinate with state supervisory agencies. Noting that the prevalence of joint examinations and the pilot Alternating Examination Program necessitate NCUA coordinate implementation of this rule with state regulators, NASCUS urged the agency to work with states to ensure a mutual understanding of how NCUA examiners will manage supervision of activities “for which guidance rather than rules form the foundation of supervisory expectations.” NASCUS also urged the agency to ensure state regulators understand how NCUA will incorporate state reliance on state guidance into joint examinations – or in alternating exams where NCUA may be the lead. “NCUA must also communicate to state regulators what, if any, effect state examinations citing state guidance will have on NCUA reliance upon, and acceptance of, state examinations of a federally insured state credit union,” NASCUS added.
- The agency should consider incorporating definitions of covered guidance into a final rule. NASCUS suggested that a final rule would benefit from additional clarification as to what is “supervisory guidance,” noting that the proposal does not contain a formal definition. “It is foreseeable that confusion could arise as to whether existing and future issuances are covered by the rule,” NASCUS wrote. “For example, NCUA Interpretive Rules and Policy Statements (IRPS) are part exempted interpretive rules and covered policy statements. NCUA might consider explicitly identifying existing and future issuances as either covered supervisory guidance or exempt interpretive rule to provide clarity for stakeholders.”
Finally, NASCUS urged the agency to “remain vigilant” to ensure implementation of the proposal (should it become a final rule) does not inadvertently diminish communication of supervisory and regulatory expectations to credit unions.
LINK:
NASCUS comment: Proposed Rule, Role of Supervisory Guidance
(Jan. 8, 2021) NASCUS supports NCUA’s proposed derivatives rule, but has made two recommendations to the agency that the association said would make the proposal more flexible for the needs of the state credit union system.
In the letter filed Dec. 28, NASCUS noted that the proposal would continue to defer to state law for federally insured state credit union (FISCU) derivatives authority, and adjust the timeframe for FISCUs to notify NCUA of derivatives activity. The proposal was issued by the NCUA Board Oct. 15. It is designed, the agency said then, to make the agency regulations over derivatives less prescriptive and more principles-based – and expand federal credit unions’ (FCUs) authority to purchase and use derivatives as part of their interest-rate risk (IRR) management.
For the state system, a key part of the proposal (as NASCUS noted in its letter) is continued recognition by NCUA of the primacy of state law in determining investment authority for FISCUs. The association made two recommendations for improving the proposal by, NASCUS said, enhancing coordination between NCUA and state supervisory authorities (SSAs).
First, NASCUS said the agency should eliminate redundant supervisory notice requirements where applicable. The agency, NASCUS 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.
NASCUS cited the examples of Georgia and Connecticut as states where prior approval from the state regulator is required. “Exempting FISCUs in states where the state regulator is willing to provide notification to NCUA on behalf of FISCUs eliminates redundancy, streamlines the regulatory framework, provides regulatory relief for credit unions, and reduces the potential for confusion resulting from different state and federal notification timeframes,” NASCUS wrote.
Second, NASCUS recommended 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.”
LINK:
NASCUS Comment: Proposed Rule — Derivatives (RIN 3133–AF29)