(Nov. 12, 2021) A summary of NCUA’s new rule on federal credit union service organizations (CUSOs) – adopted Oct. 21 by the NCUA Board on a 2-1 vote – has been published by NASCUS; it is available to members only.
The final rule gives CUSOs owned by FCUs the power to originate any type of loan an FCU may originate – and give the NCUA Board more flexibility in approving permissible CUSO activities and services. It becomes effective Nov. 26. Board Chairman Todd Harper voted against finalizing the rule.
By allowing FCU-owned CUSOs to originate any type of loan an FCU can, the list of permissible loans by FCU CUSOs is expanded from only business loans, consumer mortgage loans, student loans, and credit cards. The list of new loans includes automobile and small-dollar (payday) loans – the two types NCUA has said would likely draw the newest involvement by CUSOs.
In its comment filed on the proposal last spring, NASCUS noted as a key concern with the proposal that possible, additional reporting requirements for state credit unions could be a result of a finalized rule. NASCUS noted that the proposal could influence state credit unions considering collaborating with FCU investors in the formation and ownership of a CUSO – a condition that prompted the association 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.
Following the rule’s adoption last month, NASCUS President and CEO Lucy Ito said the association views the final rule as a “natural evolution” in a robust dual charter system. However, she noted the additional reporting requirements and added that the state system will review the final rule closely and work with NCUA to resolve any unintended, negative impacts on state credit union CUSOs.
LINK:
NASCUS Final Rule Summary: FCU CUSOs (Parts 712) (members only)
(Oct. 15, 2021) Finalizing a proposed – and contentious — rule on expanded lending and services provided by federal credit union (FCU) credit union service organizations (CUSOs) highlights the scheduled agenda for next week’s meeting of the NCUA Board.
In other action, the board will consider finalizing a rule that would add an “S” (Sensitivity to Market Risk) component to the existing CAMEL rating system and redefine the “L” (Liquidity Risk) component, thus updating the rating system from CAMEL to CAMELS.
The CUSO rule was proposed at the beginning of the year. It would deem as permissible for CUSOs the origination of any type of loan that an FCU may originate; and grant the NCUA Board additional flexibility to approve permissible CUSO activities and services. The agency also sought comments on broadening FCUs’ authority to invest in CUSOs.
But, from the beginning, the proposal has been controversial. It was released Jan. 14 on a 2-1 vote of the NCUA Board, with then-Board Member (now Chairman) Todd Harper dissenting. Harper, making his objection, noted the NCUA’s lack of direct supervisory authority over CUSOs and indicated the proposal raised potential consumer protection concerns. He said such a rule “will create a Wild West within the credit union space,” affording “little accountability for consumer protection” as CUSOs could exceed the restrictions applied to FCU lending in areas such as interest rate, loan term, and repayment.
Shortly after that board meeting, Harper was named chairman of the three-member board by the newly inaugurated President Joe Biden (D). He replaced current Board Member Rodney Hood in the position.
Since then, the proposal stalled. It was originally issued with a March 29 comment deadline (about 60 days after its proposal). The agency then extended the comment period another 30 days.
Last month, the board agreed to consider finalizing the rule (along with two other outstanding proposals) in upcoming board meetings over three months; the CUSO rule was the first on the list. However, controversy again dogged the proposed CUSO rule, as it (and the other two rules, to be considered in November and December) were approved for future, final consideration on a vote of 2-1, with Harper again dissenting. In doing so, he reiterated his concerns about the potential of the proposed CUSO rule for growing an “already unregulated space within the credit union system, with little accountability for protecting consumers and credit unions.”
In its comment filed on the proposal (on April 30), NASCUS noted as a key concern with the proposal that possible, additional reporting requirements for state credit unions could be a result of a finalized rule. NASCUS noted that the proposal could influence state credit unions considering collaborating with FCU investors in the formation and ownership of a CUSO, — which prompted the association 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.
The CAMELS proposal was put forth in January (the same meeting at which the CUSO proposal was issued) and was approved for public comment on a unanimous vote by the board. The proposal would bring the NCUA’s rating system up to date with a change that banking regulators incorporated decades ago and satisfy a recommendation the agency’s inspector general has been recommending for about the past five years.
Nearly five years ago, NASCUS wrote to NCUA urging the change and adding the “S” component. “NASCUS and state supervisory agencies encourage NCUA to consider earlier adoption of ‘CAMELS,’” NASCUS’ Lucy Ito wrote in the June 2016 letter to the board. “We again note that the separation of the ‘S’ component does not require a credit union to develop additional management system enhancements where market risk is already appropriately identified, measured, monitored and managed as part of the ‘L’ component.”
She also noted that in states that have adopted CAMELS (now totaling 24 – up from 16 when she wrote the letter), that regulators and credit unions have reported positive outcomes with nearly no additional regulatory burden.
In its comment letter filed last spring, NASCUS wrote that 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. However, NASCUS added, 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.
Also on the agenda for Thursday’s meeting is a board briefing on cybersecurity. The NCUA Board meeting is scheduled to get underway at 10 a.m., and to be live-streamed via the Internet.
LINKS:
Board Agenda for the October 21, 2021 Meeting
NASCUS comment: Notice of Proposed Rulemaking Regarding CAMELS Rating System
NASCUS comment: Proposed Rule, Credit Union Service Organizations (CUSOs) – RIN 3133–AE95
(Aug. 6, 2021) Congress should give NCUA authority to examine (and enforce actions) over third party vendors, NCUA Board Chairman Todd Harper said in testimony to the Senate Banking Committee this week. He also urged Congress to make several improvements to the National Credit Union Share Insurance Fund (NCUSIF).
In May, Harper made similar requests before the House Financial Services Committee.
On exam authority, Harper asked Congress to give his agency exam and enforcement oversight of third-party vendors, including credit union service organizations (CUSOs). Calling the lack of authority a “regulatory blind spot,” Harper asserted that NCUA should have comparable authority as other federal financial institution regulators already have.
“While there are many advantages to using these service providers, the concentration of credit union services within CUSOs and third-party vendors presents safety and soundness and compliance risk for the credit union industry,” Harper told the committee.
He said the top five credit union core processor vendors provide services to approximately 87% of total assets held by credit unions. Additionally, he said, the top five CUSOs provide services to nearly 96% of total credit union system assets.
“A failure of even one of these vendors represents a significant potential risk to the (National Credit Union) Share Insurance Fund and the potential for losses from these organizations are not hypothetical,” Harper asserted. “Between 2008 and 2015, CUSOs contributed to more than $300 million in losses to the Share Insurance Fund alone.”
The NCUA Board chairman told the committee that the continued transfer of operations from credit unions to CUSOs and other third parties diminished the agency’s ability to “accurately assess all the risks present in the credit union system and determine if current CUSO or third-party vendor risk-mitigation strategies are adequate.”
NASCUS supports the agency obtaining the power over technology service providers (TSPs) that provide services to federally insured credit unions — provided that any such authority requires NCUA to rely on state examinations of such service providers where such authority exists at the state level. Further, NASCUS supports efforts to strengthen state regulatory exam and supervision of third parties providing services to state-chartered credit unions.
Regarding the insurance fund, Harper made three legislative requests to the committee:
- Increase the fund’s capacity by removing the 1.50% statutory ceiling on its capitalization;
- Remove the limitation on assessing premiums when the equity ratio exceeds 1.30% of equity in the fund to insured shares, giving the NCUA Board discretion on the assessment of premiums;
- Institute a risk-based premium system.
LINK:
(Feb. 5, 2021) Three summaries of recent NCUA proposals were posted this week by NASCUS, dealing with the addition of a new component to the examination rating system, lending by CUSOs, and the agency’s communications program.
More specifically, the summaries (which are available to members only) outline:
- A proposal to add an “S” (for market sensitivity) to the CAMEL rating system. At its January meeting, the NCUA Board voted unanimously to issue a proposal (for a 60-day comment period) to add the component to its rating system — an addition long supported by NASCUS for the federal regulator – especially since 24 states have already incorporated the component into their own exams. The proposal would also redefine the “L” (Liquidity Risk) component in the existing rating system. According to NCUA, if adopted, the rule would likely take effect in the first quarter of 2022. The agency said that the proposal would provide greater clarity and transparency regarding credit unions’ sensitivity to market risk and liquidity risk exposures once adopted. “The proposed addition would make the NCUA’s rating system more consistent with the other financial institution regulators’ ratings system both at the federal and state levels,” the agency said. NASCUS President and CEO Lucy Ito said, when the proposal was issued last month, that state examiners have observed for some time that the extended low-yield environment may encourage greater risk taking by financial institutions. “We urge the agency to finalize this proposal as soon as possible following the comment period and as soon as practicable following necessary technical re-programming,” she said.
- A plan to allow CUSOs to make any loan a federal credit union (FCU) can make. Also at its January meeting, the board issued a proposal (for a 30-day comment period) that would add to the agency’s list of permissible CUSO services the expanded lending powers. The proposal expands the list of permissible loans by CUSOs from only business loans, consumer mortgage loans, student loans, and credit cards to any type of loan an FCU may originate, including, for example, automobile and small-dollar (payday) loans – the two types NCUA said would likely draw the newest involvement by CUSOs.
- A “request for information” (RFI) from credit unions on NCUA’s communications methods. Earlier last month, the NCUA released the RFI (for a 60-day comment period) on its communications processes in an effort, it said, to “promote efficiency and increase transparency.” Specifically, the agency said, the RFI “seeks public input on how the agency can maximize efficiency and minimize burdens associated with obtaining information on federal laws, regulations, policies, guidance, and other materials relevant to federally insured credit unions.” The RFI contained questions about the effectiveness of its press releases, social media content, and the timing and frequency of agency communications. There are also questions related to improving the agency’s websites, online data resources, and the delivery and format of supervisory guidance, NCUA said.
LINKS:
Summary: Proposed Rule, CAMELS Rating System
NASCUS Summary: Proposed rule, CUSOs (part 712)
Summary: Request for Information, NCUA Communications & Transparency
(Jan. 15, 2021) In other action at its Thursday meeting, the NCUA Board:
- Adopted a final rule clarifying that corporate credit unions may purchase subordinated debt instruments issued by natural person credit unions (allowed under a final rule issued by NCUA late last year). The final rule also specifies the capital treatment of these instruments for corporate credit unions that purchase them. NASCUS and the state system strongly supported the subordinated debt rule, which allows well-capitalized, federally insured credit unions to count subordinated debt as capital for risk-based net worth purposes. The agency said it delayed finalizing the corporate rule, proposed in February 2020, until the subordinated debt rule itself was approved last month.
- Released (for a 30-day comment period, on a 2-1 vote with Harper dissenting) a proposed rule that would add to the agency’s list of permissible CUSO services the origination of any type of loan that a federal credit union (FCU) may originate. This expands the list of permissible loans by CUSOs from only business loans, consumer mortgage loans, student loans, and credit cards to any type of loan an FCU may originate, including, for example, automobile and small-dollar (payday) loans – the two types NCUA said would likely draw the newest involvement by CUSOs.
- Issued (for a 30-day comment period, on a 2-1 vote again with Harper voting no) a proposal raising the threshold for a credit union to be considered “complex” under risk-based capital rules from $50 million to $500 million and a risk-based net worth requirement that exceeds 6%. The change, if adopted, would be effective until the current risk-based capital (RBC) rule goes into effect, currently set for Jan. 1, 2022. “The COVID-19 pandemic has created a vital need for financial institutions, including credit unions, to provide access to responsible credit and other member services to support consumers,” which the agency inferred would be facilitated by the proposal.
- Heard a report on its 2021 Annual Performance Plan, which essentially outlines the general direction of the agency for the coming year through its strategic goals of: Ensuring a safe and sound credit union system; providing a regulatory framework that is transparent, efficient and improves consumer access; and “maximizing organizational performance to enable mission success.”
LINKS:
Final Rule, Part 704, Corporate Credit Unions
Proposed Rule, Part 702, Risk-Based Net Worth, Complex Threshold