(July 30, 2021) NCUA gets a chance to share its views with the Senate next week when Board Chairman Todd Harper is scheduled to testify before the body’s Banking Committee. He will be joined for the Tuesday (Aug. 3) hearing on a panel by federal banking regulators, including FDIC Chairman Jelena McWilliams and Acting Comptroller of the Currency Michael J. Hsu. According to the committee’s website, the title of the hearing is “Oversight of Regulators: Does our Financial System Work for Everyone?” Sen. Sherrod Brown (D-Ohio) chairs the Senate Banking Committee. The hearing is scheduled to get underway at 10 a.m., and will be live-streamed via the Internet.
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(July 30, 2021) Credit unions should review a June 30 rule temporarily amending certain mortgage servicing requirements under the Consumer Financial Protection Bureau’s (CFPB) Regulation X to assist borrowers affected by the COVID-19 emergency, NCUA said this week in a “regulatory alert.”
The agency’s alert noted that the CFPB rule only applies to servicers that service mortgages secured by a borrower’s principal residence. The rule – which takes effect Aug. 31 — does not apply to small servicers, the agency said.
Key provisions of the rule, NCUA said, are that it:
- Defines a COVID-19 related hardship as “a financial hardship due, directly or indirectly, to the national emergency for the COVID-19 pandemic” declared March 13, 2020 (beginning on March 1, 2020) and continued Feb 24 of this year.
- Modifies early intervention requirements of live-contact messages and reasonable diligence obligations to “help ensure that borrowers experiencing a COVID-19 related hardship have timely and accurate information about their loss mitigation options.” That includes that servicers must take additional actions, until Oct. 1, 2022, during live contacts related to a COVID hardship.
- Permits servicers to offer loan modifications to borrowers facing a COVID-19 related hardship based on an evaluation of an incomplete application if specified criteria are met.
- Sets up temporary COVID loss mitigation procedural safeguards to ensure a borrower has a “meaningful opportunity to pursue loss mitigation options.” NCUA said that, from Aug. 31 through Dec. 31 – unless an exception applies – a servicer must meet at least one of the specified safeguards before initiating any judicial or non-judicial foreclosure process where a borrower became more than 120 days delinquent on or after March 1, 2020, and the applicable state statute of limitations regarding foreclosures expires on or after Jan. 1, 2022.
NASCUS will prepare and post a summary of the alert (available to members only).
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(July 30, 2021) Any discussion about the normal operating level (NOL) of the federal credit union share insurance fund must acknowledge that the actual equity ratio of the fund is inextricably tied to NCUA’s budget and the overhead transfer rate (OTR), NASCUS wrote in a comment letter this week.
Further, NASCUS wrote, if an elevated NOL is deemed necessary by the agency, NCUA should take steps to reduce the OTR, restoring millions of dollars toward maintaining the NOL and increasing the potential for distributions to stakeholders.
NASCUS was responding to a comment call by NCUA, issued in May, on the agency’s policy guiding determination of the NOL. Now, the NOL (the target equity ratio set for the insurance fund by the NCUA Board) is set at 1.38%. Under the law, the board may set the NOL at anywhere between 1.2% to 1.5%. If the equity level is greater than the NOL, the NCUA Board may vote to make a distribution back to credit unions of the equity in the fund above the NOL (as it did two years ago).
The agency said in May that its re-evaluation of NOL policy was prompted by two events: the current economic landscape (along with the impact of current forbearance programs ending, and likely evictions rising – both perhaps leading to loan underperformance), and pending events related to the corporate asset management estates and end of the NCUA Guaranteed Notes (NGN) Program. Staff noted then that the NOL will no longer have to take into consideration the NGNs after June, since the last of the notes will have been, by then, liquidated (which they were).
The agency sought comments in a variety of different areas, including when public comment should be sought when a change to the NOL is proposed, and the basis for evaluating the insurance fund’s performance.
NASCUS also wrote that it supported continuing the opportunity for stakeholders to participate in considerations of even modest 1 basis point adjustments to the NOL, as well as on the OTR and other adjustments or changes to the NCUSIF.
“Given the cost of maintaining the NCUSIF’s equity ratio at the NOL as determined by the NCUA Board is borne by credit union stakeholders, we believe the policy of notice and public comment before any change of 1 basis point or greater in the NOL should be maintained,” NASCUS wrote.
Writing that the state system supports a “counter-cyclical approach to funding the NCUSIF based on annual modeling utilizing scenarios developed by the Federal Reserve,” NASCUS stated that it supports a moderate recession as the model, with the use of the Federal Reserve baseline and adverse (when available) scenarios to test the model. “NASCUS encourages NCUA to factor into its modeling the historical performance of the NCUSIF and the credit union system to better calibrate the true needs of the SIF while returning as much money to credit unions as prudent for deployment in service of members,” NASCUS wrote.
But discussion of the NOL is not complete, NASCUS asserted, without admitting that the actual equity ratio of the SIF is inextricably tied to NCUA’s budget and the Overhead Transfer Rate (OTR).
“The simple fact is that NCUA has withdrawn over $1.7 billion from the SIF in the past decade ($1 billion of that in just the past five years) to fund agency operations,” NASCUS wrote. “Without question, the NCUSIF should fund its own administration and a robust supervisory program that identifies and mitigates material risk in the federally insured credit union system. But the fact remains that an elevated NOL, combined with the OTR, cannibalizes SIF investment earnings and denies credit unions SIF distribution opportunities.”
The association indicated that the agency should reduce the OTR, which would restore millions of dollars toward maintaining the NOL and increase the potential for distributions to stakeholders.
“Next to setting the OTR, establishing the NOL is one of the most consequential policy determinations administered by the NCUA,” NASCUS wrote. “Over the past several years, NCUA has taken steps to bring more transparency to the OTR and NCUSIF. NASCUS applauds and supports those efforts. We encourage NCUA to continue enhancing the transparency related to the accounting of the NCUSIF, the OTR, and modeling and factors contributing to the determination of the NOL.”
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NASCUS Comment: Policy for Setting the Normal Operating Level
(July 23, 2021) In other action Thursday, the NCUA Board issued a request for information on digital assets and related technologies, with a particular eye on current and potential uses for credit unions and the risks associated with them.
In issuing the RFI, NCUA said it wanted to engage the credit union system and other stakeholders and learn how emerging distributed ledger technology (DLT) and decentralized finance (DeFi) applications are viewed and used. In particular, the agency said, it wants feedback on the role NCUA can play in “safeguarding the financial system and consumers in the context of these emerging technologies.”
“The accelerating pace of change information technology brings, coupled with the widespread diffusion of computing power and the growing importance of networks, is raising new opportunities and challenges,” the agency said. “In order to continue to fulfill its mandate to maintain a safe and sound credit union system and protect credit union members, the NCUA is working to better understand the implications of these changes and the associated benefits or challenges that may exist.”
The agency described DeFi as the broad category of applications adopting peer-to-peer networks to create digital assets like cryptocurrency and crypto-assets, clearing and settlement systems, identity management systems, and record retention systems. DLT (which includes blockchains) consists of a shared electronic database where copies of the same information are stored on a distributed network of computers.
Comments will be due in 60 days after publication in the Federal Register.
In a late development, the agency board dropped consideration of its 2022-26 strategic plan for this meeting (which it announced in a press release the day before the board meeting). Given that there will be no August NCUA Board meeting, the earliest the strategic plan could reappear on the board’s agenda would be for its September meeting.
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Request for Information and Comment, Digital Assets and Related Technologies
(July 23, 2021) Federally insured credit unions with $500 million or more in assets could avoid risk-based capital (RBC) requirements and opt-in to a new measure of capital adequacy if they meet a minimum net worth standard and other qualifying criteria, under a proposal issued by the NCUA Board Thursday.
Called the Complex Credit Union Leverage Ratio (CCULR, and dubbed “cooler” by members of the board), the proposal would allow the $500 million and more credit unions to opt in to the new capital standard if they also hold a minimum net worth ratio of 9% as of Jan. 1 of next year (which will be gradually increased to 10% two years later).
Other qualifying criteria include: off-balance sheet exposures held by the credit union must be 25% or less of total assets; trading assets and trading liabilities must be 5% or less of total assets; and goodwill and other intangibles must be 2% or less of total assets.
“A complex credit union that opts into the CCULR framework would not be required to calculate a risk-based capital (RBC) ratio under the Oct. 29, 2015, risk-based capital final rule” as amended in October, 2018, the proposal’s summary states. “A qualifying complex credit union that opts into the CCULR framework and that maintains the minimum net worth ratio would be considered to be well capitalized.”
Issued on a unanimous vote by the board, the proposal would make other changes to the RBC rule, according to the summary, including addressing asset securitizations issued by credit unions, clarifying the treatment of off-balance sheet exposures, deducting certain mortgage servicing assets from a complex credit union’s risk-based capital numerator, updating several derivative-related definitions, and clarifying the definition of a consumer loan.
As both NCUA staff and board members noted during the meeting, the proposal is similar to the community bank leverage ratio (CBLR) adopted by the federal banking agencies for banks and which became effective in 2020. That rule removes requirements for calculating and reporting risk-based capital ratios for most banks with less than $10 billion in assets that hold 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.
The NCUA proposal was issued with a 60-day comment period, which means it would end sometime in either late September or early October. That doesn’t give NCUA much time to consider whatever comments it receives before finalizing a rule that will, in effect, directly affect the risk-based capital (RBC) rule set to take effect on Jan. 1.
During discussion, NCUA Board Chairman Todd Harper called the proposal a prudent course of action. “This proposal is an appropriate measure that provides complex credit unions with a streamlined approach to managing their capital levels while also strengthening the system’s resiliency to economic shocks,” he said.
He said year-end 2020 call report data indicate that nearly 75% of complex credit unions would meet the 9% net worth requirement under the proposal. He also asserted that the proposal would increase the capital buffer of insured complex credit unions, by $22 billion (to an estimated $104.6 billion) , if all of the credit unions “opted in” to the rule. (The increase in capital is compared to the total amount if the RBC rule were in effect, Harper noted.)
Board Vice Chairman Kyle Hauptman said the chief benefit of the proposal is that it allows some credit unions to bypass the risk-based capital approach. “For me, the point of this simpler leverage ratio is that it protects both credit unions and the (National Credit Union) Share Insurance Fund from the inevitable problems of risk weighting,” he said.
Although Board Member Rodney Hood said he would “begrudgingly” vote for the proposal (which he did), he took the opportunity before the vote to call for an end to the RBC rule. He said he wants the board to either table the RBC rule or rescind it, noting that it would be eight years old when it fully takes effect. “RBC should be a tool and not a rule,” he said.
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Notice of Proposed Rulemaking, Parts 702 and 703, Complex Credit Union Leverage Ratio
(July 16, 2021) A proposed rule on a new complex credit union leverage ratio (CCULR) is on the agenda for a the NCUA Board when it meets next week in open session.
Also on the agenda for the 10 a.m. meeting (to be live-streamed via the Internet) will be a request for information (RFI) on digital assets and related technologies. The board will also consider its 2022-26 strategic plan.
Based on past comments by the agency, the CCULR proposal would likely integrate an NCUA equivalent of the community bank leverage ratio (CBLR) into NCUA’s capital standards. The bank regulation (adopted by federal banking agencies in 2019) 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.
In a comment letter filed in May with the agency, NASCUS said it was encouraged by the agency’s consideration of a CCULR, and supported further development.
“NASCUS has previously encouraged NCUA to consider adopting an off-ramp to the 2015 Risk-Based Capital Rule commensurate with the Community Bank Leverage Ratio (CBLR),” NASCUS wrote in its May 10 comment letter on a related issued, simplifying risk-based capital requirements.
“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 added. “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 noted, in its comment, that parallels between a CCULR proposal and the existing bank CBLR is another advantage. “The regulatory and commercial experience with the CBLR can help inform the development and implementation of NCUA’s CCULR proposal,” NASCUS wrote.
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NCUA Board agenda, July 22 meeting
(July 16, 2021) A 14-day application extension is among the “clarifications and amendments” planned for the capital investment program created for community development financial institutions (CDFIs) and minority depository institutions (MDIs) in the face of the coronavirus crisis, NCUA reminded late last week.
NCUA drew attention to the extension in an “NCUA Express” item made public July 8. The extension is part of revisions being made to the Emergency Capital Investment Program (ECIP) developed by Treasury last year to assist CDFIs and MDIs that may be disproportionately affected by the financial impacts of the COVID-19 pandemic.
In a July 1 announcement, Treasury said the deadline to submit an application under the ECIP would be extended by 14 days once guidance is published by Treasury (which, as of Thursday, had not been released). The previous deadline was July 6. No other details were provided on the planned. clarifications and amendments.
The ECIP was established under the Consolidated Appropriations Act, 2021. Under this program, Treasury will provide up to $9 billion in capital directly to depository institutions that are certified CDFIs or 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.
Revisions to already-submitted applications made be requested via Treasury; see the link below.
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Treasury Emergency Capital Investment Program
(July 16, 2021) A focus on consumer financial protections for military servicemembers and their families is the target of a webinar slated July 28 by NCUA, CFPB and the Federal Trade Commission (FTC). The webinar is being held as part of Military Consumer Month. In its announcement this week, NCUA said staff from all three agencies will highlight federal resources that help servicemembers, veterans, and their families manage their finances and shield themselves against frauds and scams. The 45-minute webinar begins at 2 p.m. Registration is open now.
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Registration for NCUA, CFPB, FTC miltary consumer financial protections webinar
(July 16, 2021) The “first phase” of NCUA’s plan to resume onsite operations – including exams — will begin Monday, the agency said this week, with staff and contractors permitted to volunteer to work onsite in locations where pandemic conditions have “sufficiently moderated,” the agency’s chairman said in a Letter to Credit Unions Wednesday.
In a letter to credit unions (NCUA letter 21-CU-06), NCUA Board Chairman Todd Harper said the determination of whether conditions have sufficiently moderated will be based on public health data for those areas.
“To the extent they exceed the NCUA’s safety protocols for Phase 1, NCUA staff working onsite in credit unions will generally be expected to follow credit union policies related to safety and security,” Harper wrote. “To the extent possible, the NCUA will respect a credit union’s preference to not have examination staff onsite during this phase. However, the NCUA reserves the right to conduct onsite work at a credit union if necessary to address a serious and time-sensitive matter.”
NCUA will continue to maintain heightened safeguards in its facilities to ensure the health and safety of staff and any visitors, the letter states. It also points out that the agency will continue to monitor conditions and inform credit unions of any changes in how it plans to conduct operations, “including examination procedures and protocols affected by the pandemic.”
NASCUS has already prepared a summary of the letter (available to members only).
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(July 9, 2021) Community First Fund Federal Credit Union, of Lancaster, Penn., was chartered this week by NCUA, the second credit union chartered so far this year by the federal regulator. The new institution is sponsored by the nonprofit Community First Fund to serve the approximately 550,000-person community of Lancaster County; operations are expected to begin by year’s end. The credit union plans to offer credit cards and first mortgages … The position of chief operating officer (COO) is “retired” at the OCC under a reorganization plan announced this week by the agency; however, Blake Paulson, the veteran occupant of that position (and former acting comptroller) will stay with the agency but in a new role. The agency’s bank supervision units (the bank supervision policy, midsize and community bank supervision, large bank supervision, and supervision risk and analysis) and the office of management will now report directly to Acting Comptroller Michael J. Hsu. Since 2019, those divisions reported to the agency’s COO … NASCUS participated in this week’s annual conference of the International Credit Union Regulators’ Network (ICURN), held virtually Wednesday and Thursday. NASCUS President and CEO Lucy Ito serves on the ICURN Board of Directors. In conjunction with the event, ICURN announced a new virtual training program for credit union supervisors, running from Sept. 20-24. The virtual course is based on the group’s in-person training program, ICURN said.
(July 9, 2021) A slow, methodical approach should be taken to determining the best regulatory scheme to address the use of the developing technology of artificial intelligence/machine learning (AI/ML) by financial institutions, the state system has advised NCUA and the CFPB in a comment letter submitted late last week.
In addition, NASCUS wrote in its comment letter to the agencies, that approach must also incorporate “close coordination and collaboration between federal and state regulators in addition to the continued collection of input from other stakeholders.”
In March, the agencies opened a 60-day comment period (which they later extended by 30 days) for Information about how financial institutions use AI in their activities, including fraud prevention, personalization of customer services, credit underwriting, and more.
NASCUS wrote that, in developing guidance and regulation, the agencies would need to provide “insight on important factors such as choosing appropriate data sets, transparency, explainability, accountability and appropriate assessment standards among other things.”
Noting that any guidance and regulation would need to be risk-based and flexible but not stifle innovation, NASCUS said it strongly encouraged the agencies to develop rules and guidelines that would accommodate the needs of all institutional asset sizes. “Guidance or regulation that is too inflexible or that makes AI/ML cost prohibitive may severely impact smaller institutions’ ability to utilize these tools, which may ultimately result in lost opportunities/advantages for impacted consumers,” NASCUS wrote.
The state system also recommended a common lexicon be developed for use of AI to establish a common understanding of just what the technology (and related concepts) constitutes. “An agreed-upon set of foundational definitions would likely go a long way toward avoiding future confusion among stakeholders related to divergent regulatory guidance and rules issued to address this area,” NASCUS advised.
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(July 2, 2021) More than $865 million will be distributed by September to credit unions that were account holders at three failed corporate credit unions as NCUA closes its program to resolve the institutions, the agency said this week.
In a release, NCUA said the distribution of $865.5 million would be made to 1,800 credit union capital account holders of the former Members United, Southwest Corporate and U.S. Central corporate credit unions.
The three corporate credit unions were initially taken over by NCUA in 2010. Between then and now, the agency set up what it called the “Corporate System Resolution Program,” which issued notes guaranteed by the agency to investors to help the credit union system resolve the failures of those corporates and two others: Western Corporate (also known as WesCorp) and Constitution Corporate.
Also this week, NCUA announced the termination of the NCUA Guaranteed Notes (NGN) program, the financial program which stood behind the resolutions. The agency said that it will “continue to effectuate its plan to orderly liquidate the remaining post-securitized assets and make further distributions when possible.”
In its release, NCUA noted that, to date, it has previously made two rounds of distributions: The first, in July 2020, to the former credit union capital holders of Southwest Corporate; the second, in April of this year, to the former credit union capital holders of Southwest Corporate, Members United, and U.S. Central.
The agency said the former capital holders of those three corporates will also receive the latest round of distributions.
The third distribution will mean a total $1.3 billion will have been distributed to the former account numbers, NCUA said.
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NCUA to Distribute $865.5 Million Under Corporate System Resolution Program