(May 28, 2021) The delay to Oct. 1, 2022 of the mandatory compliance date of the general qualified mortgage (QM) final rule is the subject of a regulatory alert issued by NCUA this week and sent to all federally insured credit unions.
The letter details action taken by CFPB in late April, which moved compliance with the QM rule to Oct. 1 of next year from July 1 of this year. The bureau said in April that the delay was made to “help ensure access to responsible, affordable mortgage credit, and preserve flexibility for consumers affected by the COVID-19 pandemic and its economic effects.”
The final rule making the change was titled “April 2021 Amendments to the ATR/QM Rule” (ATR stands for “ability to repay”).
In its alert, NCUA notes the two categories that the compliance date delay affects: General QMs and temporary GSE QMs (referring to QMs issued by government-sponsored enterprises Fannie Mae and Freddie Mac).
The alert notes that, under the general GM category, a lender can use either the original underwriting process (with the 43 percent DTI limit) or the new underwriting process (with price-based thresholds) for applications received from March 1, 2021, to Sept. 30, 2022. Lenders must use the revised General QM loan definition for applications received on or after Oct. 1, 2022.
Under the GSE category, the Alert states, the temporary GSE QM loan definition expires upon the earlier of Oct. 1, 2022, or the date the applicable GSE exits federal conservatorship (rather than on the original mandatory compliance date of July 1, 2021, or the date the applicable GSE exits federal conservatorship).
(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 28, 2021) An overview of the letter to credit unions on the future of the LIBOR reference rate is the latest summary to be posted by NASCUS; it is available to members only.
Last week, NCUA issued the letter (21-CU-03) essentially telling credit unions stop using LIBOR (the London Interbank Offered Rate) as soon as possible. Failure by credit unions to prepare for disruptions of LIBOR “could undermine a federally insured credit union’s financial stability, and safety and soundness,” the NCUA letter stated. “The LIBOR transition is a significant event that credit unions should manage carefully.”
The agency last week also issued on the same subject its first “Supervisory Letter” of the year, which NCUA said “provides the supervision framework examiners will use to evaluate a credit union’s risk management processes and planning regarding the transition from LIBOR.”
The supervisory letter outlines the background, potential LIBOR exposure for credit unions, and examination considerations – but offers no endorsement of a specific replacement for USD LIBOR.
LINK:
NASCUS Summary, Evaluating LIBOR Transition Plans (members only)
(May 21, 2021) An extension to July 1 for the deadline to comment on how credit unions and banks use artificial intelligence (AI) in their activities was announced this week by NCUA and other federal financial institution regulators.
The original comment deadline was June 1, but regulators said they were extending that in response to concerns from commenters noting “the complex technical nature and significance of the topic.”
The invitation to comment was provided in a request for information (RFI) published in late March by NCUA, CFPB, FDIC, the Federal Reserve, and the OCC.
The five agencies are seeking information from the public on how financial institutions use AI in activities such as fraud prevention, personalization of customer services, credit underwriting, and other operations. Regulators said they are seeking to better understand the use of AI, including machine learning, by financial institutions; appropriate governance, risk management, and controls over AI; and challenges in developing, adopting, and managing AI.
LINK:
Agencies Extend Comment Period on Request for Information on Artificial Intelligence
(May 21, 2021) Stopping the use of LIBOR as a reference rate as soon as possible as a year-end expiration date looms is encouraged for all federally insured credit unions, NCUA said in letters released this week.
In the first (a Letter to Credit Unions (LTCU)), the agency said failure by credit unions to prepare for disruptions of the London Interbank Offered Rate (LIBOR) “could undermine a federally insured credit union’s financial stability, and safety and soundness.” LIBOR is a reference rate used by many financial institutions – including credit unions – to set rates on such financial products as adjustable mortgages and student loans (which NCUA said “make up a significant portion of LIBOR-indexed loans owned by credit unions.”) The rate is scheduled to be phased out at the end of this year (legacy contracts using the rate are scheduled to stop using the rate by mid-2023) because assumptions it uses have become unreliable in reflecting current economic and financial conditions.
“The LIBOR transition is a significant event that credit unions should manage carefully,” the LTCU, signed by Board Chairman Harper, states. It notes that the FFIEC has issued a statement which recommends that new financial contracts use a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation.
Harper said the second letter released Monday by the agency, a “Supervisory Letter” (SL No. 21-01 – the first of the year), “provides the supervision framework examiners will use to evaluate a credit union’s risk management processes and planning regarding the transition from LIBOR.” The guidance in that letter, Harper stated, applies to all federally insured credit unions.
The supervisory letter outlines the background, potential LIBOR exposure for credit unions, and examination considerations – but offers no endorsement of a specific replacement for USD LIBOR. (That includes use of the Federal Reserve-developed Secured Overnight Financing Rate (SOFR), which was created specifically as a replacement for LIBOR.)
“A credit union may use a reference rate for its loans and member shares that it determines is appropriate for its risk management and member needs,” the supervisory letter states. “All LIBOR-based contracts that mature after December 31, 2021 (one-week and two-month) and June 30, 2023 (one-, three-, six- and 12-month) should include contractual language that provides for use of a robust fallback rate.”
LINKS:
NCUA Letter to Credit Unions 21-CU-03: LIBOR transition
NCUA SL No. 21-01: Evaluating LIBOR Transition Plans
(May 21, 2021) The development that, at least for now, a premium won’t be necessary to be paid by federally insured credit unions to the NCUSIF is good news for all credit unions, NASCUS President and CEO Lucy Ito said Thursday. However, she cautioned, vigilance is crucial. “Certainly there is more ahead to play out for the economy – but there is no crystal ball on the outcome for any of us. The credit union system, in any event, will have to watch all indicators carefully to determine which way things are going, and even consider some alternative approaches if necessary. Board Member Rodney Hood asked several insightful questions about the insurance fund’s investment powers and strategies – which may spark a conversation about an alternative approach for staving off premiums in the future. In any event: the state system will be part of any conversations about the fund’s finances, and the impact on the state system.”
(May 21, 2021) Giving his agency examination and enforcement authority over third-party vendors, and making key changes to the structure of the federal savings insurance fund for credit unions, were the top legislative requests made to a House committee by NCUA’s Todd Harper this week.
The NCUA Board chairman told the House Financial Services Committee – which held an oversight hearing of all of the federal credit union and banking regulators — that his agency needs the third-party exam authority because, increasingly, activities that are “fundamental” to credit unions are being outsourced to entities outside of the agency’s regulatory oversight. Those activities include, he said, loan origination, lending services, Bank Secrecy Act/anti-money laundering compliance (BSA/AML), financial management and technological services including information security and mobile and online banking.
Those third parties also include credit union service organizations (CUSOs), he said. And, he added, while there are many advantages to credit unions and members in using the 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.”
As examples, he pointed to the top five credit union core processor vendors which, he said, provide services to approximately 87% of total credit union system assets, and the top five CUSOs, which 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 Share Insurance Fund and the potential for losses from these organizations are not hypothetical,” he asserted. “Between 2008 and 2015, CUSOs contributed to more than $300 million in losses to the Share Insurance Fund alone,” he added, referring to the National Credit Union Share Insurance Fund (NCUSIF).
Harper noted that now NCUA may only examine CUSOs and third-party vendors with their permission. He asserted that continued transfer of operations to third parties (and CUSOs) “diminishes the ability of NCUA 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.
“These recommended changes, if enacted, would allow the NCUA Board to build, over time, enough retained earnings capacity in the Share Insurance Fund to effectively manage a significant insurance loss without impairing credit unions’ contributed capital deposits in the Share Insurance Fund,” he said. “Moreover, these changes would generally bring the NCUA’s statutory authority over the Share Insurance Fund more in line with the statutory authority over the operations of the (FDIC’s) Deposit Insurance Fund.”
LINK:
(May 21, 2021) In a related move Thursday, the NCUA Board voted unanimously to seek public comments on its policy that guides the determination of the insurance fund’s Normal Operating Level (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).
According to NCUA staff, a re-evaluation of the NOL policy is 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 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.
The agency said it is looking for looking for comments on a variety of subjects regarding the NOL policy, including:
- Should a moderate or severe recession be the basis for evaluating the insurance fund’s performance?
- Should a five- year period — or a longer or shorter period – be used for modeling the fund’s performance?
- How should the agency use the modeled potential decline in value of the fund’s claims on the corporate asset management estates going forward until the estates are fully resolved?
- Should the projected equity ratio decline continue to be incorporated into the NOL analysis through the end of the following year without an economic downturn (or should this period be longer or shorter, or not factored into the analysis at all)?
A 60-day comment period was set for public input.
LINK:
Request for Comment, Share Insurance Fund Normal Operating Level Policy
(May 21, 2021) There is likely no insurance premium in the immediate future for federally insured credit unions, as the estimated equity level for the federal credit union insurance fund will be slightly above the level that would trigger the process for assessing a premium, the NCUA Board was told Thursday.
During its regular monthly meeting for May, the board heard a staff report on the National Credit Union Share Insurance Fund (NCUSIF), which showed that the fund’s equity level at the end of June would stand at 1.22%. According to the Federal Credit Union Act, the board must establish a restoration plan (which would likely include a premium) for the insurance fund if the board determines the equity level will fall below 1.2% within the next six months. So far, the board has not yet made that determination.
The law only requires a premium if the equity level drops below 1.2%. Since the fund hasn’t dropped that low (at least, not yet), no premium is likely. (The board may charge a premium, under the law, if the equity ratio falls below 1.3%, but that is not a requirement.)
The likelihood of a premium could, however, change going forward. NCUA Board Chairman Todd Harper suggested that the full extent of the financial impact of the coronavirus crisis is not yet known. As forbearance programs instituted in the face of the crisis expire, Harper said, “some credit unions will likely see their performance begin to deteriorate. It is also possible that there may be no failures and losses to the fund. We just do not know.”
He added that the agency “must make sure that the share insurance fund is strong enough to weather any stresses, including failures or losses, we know may be coming.”
Vice Chairman Kyle Hauptman took a more sanguine view. “We are aware that in the next year or so, the equity ratio may well right itself without NCUA doing anything more,” Hauptman said. “I want to make that clear: we know that could happen.” But Hauptman also made it clear that no one can predict the future.
LINK:
Board Briefing, Share Insurance Fund Quarterly Report
(May 21, 2021) Also at its Thursday meeting, a final rule on derivatives was approved unanimously by the NCUA Board, making three changes from the proposal issued last December.
The rule, which affects a limited number of federal credit unions directly (NCUA estimates about 30 FCUs are engaged with derivatives now), generally offers more flexibility for credit union involvement in the investment vehicles, primarily to manage interest rate risk. State-chartered credit unions follow rules set by their individual regulators.
Under the changes made in the final rule, NCUA:
- Removed specific collateral requirements for “clear derivatives;”
- Continued with current counterparty requirements (that is, those that are swap dealers, introducing brokers, and/or futures commission merchants that are current registrants of the CFTC); and,
- Removed the prohibition on written options.
NASCUS had urged the agency, in its comment on the proposal, to eliminate redundant supervisory notice requirements where applicable by providing 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.
NCUA declined to provide the exemption, stating that “the current burden to a FISCU is unchanged as the FISCU is only notifying the applicable (NCUA) Regional Director after entering into its first Derivative transaction compared to the current requirement of notifying the Regional Director at least 30 days before it begins engaging in Derivatives.” The agency said the final rule retains the provisions of the proposed rule for the timing of notification to five days after entering its first derivative transaction.
The final rule takes effect 30 days after publication in the federal register.
LINK:
Final Rule, Parts 701, 703, 741, and 746, Derivatives
(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) 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