(March 12, 2021) After a delay of nearly two months since approval, two proposals from NCUA – on simplifying rules for risk-based capital and on adding an “S” to the exam rating system – have been finally opened for 60-day comment periods, following publication this week in the Federal Register. Comments on both proposals are due for both May 10.
On Jan. 14, the agency board approved the two proposals to be issued for comment. The proposal on simplifying risk-based capital – an advance notice of proposed rulemaking (ANPR) adopted on a 2-1 vote with (then) Board Member Todd Harper dissenting – outlines two approaches to simplifying risk-based capital requirements.
Under the first, the agency contemplates replacing the risk-based capital rule with a risk-based leverage ratio requirement, which would use relevant risk attribute thresholds to determine which complex credit unions would be required to hold additional capital. The second approach would retain the risk-based capital rule (approved in 2015 and revised numerous times, with two delays in effective dates, and now set to take effect Jan. 1, 2022) but would enable eligible complex FICUs to opt in to a “complex credit union leverage ratio” (CCULR) framework to meet all regulatory capital requirements.
The CCULR approach would be modeled on the “community bank leverage ratio” (CBLR) framework implemented under the 2018 economic growth and regulatory relief law.
The proposal on adding an “S” – for “market sensitivity” – to the agency’s CAMEL examination rating system is aimed at ensuring the agency’s exams of credit unions include a specific look at market-risk sensitivity. In conjunction with this would be a modification in the review of credit union liquidity and asset/liability management for the “L” in CAMEL.
In January, NCUA said the proposal would bring the agency’s rating system up to date with a change that banking regulators incorporated decades ago. It would also satisfy a recommendation the agency’s inspector general has been advancing for about the past five years. It was approved for comment unanimously by the agency board.
To date, 24 state credit union regulatory agencies have adopted the “S” for state-chartered credit unions.
LINKS:
NASCUS summary: ANPR, Simplification of the RBC Requirements (Parts 702 & 703) (members only)
NASCUS summary: Proposed rule: CAMELS Rating System (members only)
(March 12, 2021) Two new summaries of final rules on corporate credit union purchase of subordinated debt, and on joint ownership share accounts, were posted by NASCUS this week.
Both are available to members only.
In October the NCUA Board approved a new corporate credit union rule that, as proposed, included a section on corporate purchase of credit union subordinated debt. However, the portion on purchase of subordinated debt was left out of the final rule. The board said then it would adopt that portion of the rule once it had finalized the subordinated debt final rule. Since that rule was adopted in December, the board then finalized late last month the subordinated debt portion of the corporate rule. NASCUS supported the provision.
The final rule takes effect Jan. 1.
The joint ownership share accounts final rule was approved by the NCUA Board at its Feb. 18 meeting. The rule, which takes effect March 26, would allow account records information other than a signature card to support the insured status of a joint ownership share account in a credit union. The final rule provides federally insured credit unions with an alternative method to satisfy the membership card or account signature card requirement. NASCUS supported the proposal.
LINKS:
NASCUS summary: Corporate Credit Unions (purchase of subordinated debt) (members only)
NASCUS summary: Joint Ownership Share Accounts (members only)
(March 5, 2021) NASCUS has published its summary of NCUA’s regulatory review roster for 2021, which lists the one-third of the agency rules that it is reviewing – part of the three-year review plan by the agency. This summary is also available to members only.
Under the review plan, the agency’s Office of General Counsel maintains a rolling review schedule of one-third of NCUA rules each year, and seeks public comment on those.
Among the rules being reviewed this round: Security program, report of suspected crimes, suspicious transactions, catastrophic acts and Bank Secrecy Act compliance (Part 748 of the agency’s rules); Golden parachute and indemnification payments (Part 750); Registration of residential mortgage loan originators (Part 761); Rules of NCUA Board procedure, promulgation of NCUA rules and regulations, public observation of NCUA Board meetings (Part 791); and Post-employment restrictions for certain NCUA examiners (Part 796).
LINK:
NASCUS Summary: NCUA 2021 regulatory review
(March 5, 2021) A “regulatory alert” outlining Home Mortgage Disclosure Act (HMDA) data collection is outlined by NASCUS in one of the latest summaries to be posted by the association.
The summary is available to members only.
Last month, the agency issued its Regulatory Alert 21-RA-04, which lists the requirements for collecting HMDA data associated with mortgage loan applications processed during 2021. The alert also lists (as further noted in the summary) the HMDA data partial exemptions for certain transactions.
(March 5, 2021) Staying focused on capital and liquidity, consumer financial protection, and diversity, equity and economic inclusion will achieve a vibrant economic outcome from the impact of the coronavirus crisis for everyone, including credit unions, the NCUA Board chairman said in a speech this week.
In recorded video remarks to the Credit Union Natl. Assn.’s (CUNA) annual Governmental Affairs Conference (GAC) this week, Chairman Todd Harper urged credit unions to pay careful attention to capital, asset quality, earnings and liquidity as they and their members emerge from the crisis. He urged credit unions to mitigate problems when they develop. And, as the pandemic evolves, he said his agency will continue to adjust its supervision and examination program to mitigate potential risks to the National Credit Union Share Insurance Fund (NCUSIF). He made no mention about a premium to be paid to the fund.
Harper also advocated for creation of a dedicated program to supervise for compliance with consumer financial protection and fair lending laws. He indicated that the agency, in 2020 exams, had found “notable shortfalls” in credit union compliance with the Fair Credit Reporting Act (FCRA), the Electronic Funds Transfer Act (EFTA) and the Truth in Lending Act (TILA).
He said creation of a dedicated consumer protection unit at the agency would “better protect consumers’ interests, ensure that the credit union system lives up to its commitment to serve members, and provide a comparable level of consumer protection oversight as federal bank regulators.”
However, he also said the agency would continue to focus on compliance with forbearance provisions of the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act to help consumers facing difficulties spawned by the pandemic. “Whether it means reworking an existing loan due to financial stress, or delaying payments, the NCUA will not criticize a credit union’s efforts to provide prudent relief for members when such measures are conducted in a reasonable manner with proper controls and management oversight,” he said.
He told the group that – given the cooperative philosophy of credit unions – that each credit union “has a moral obligation to step up and help minority-owned businesses and communities recover and start anew in the months ahead.” He challenged the viewers to deliver more financial products and services “free of discrimination or unfair practices to people of color and within communities of color,” adding that such efforts will be “vital to ensuring a more equitable economic recovery.”
LINK:
NCUA Chairman Todd M. Harper Remarks before CUNA’s 2021 Governmental Affairs Conference
(Feb. 26, 2021) Comments are due March 9 on NCUA’s request for information (RFI) on how the agency can improve its communications and improve transparency. A NASCUS comment letter is in the works; see the link below for the NASCUS summary of the RFI (available to members only) … NCUA joined federal and state banking regulators this week in encouraging credit unions and banks to alter loan terms, ease regulatory reporting requirements, and take other actions to help borrowers in Texas affected by bitter cold temperatures spawned by recent winter storms which led to widespread power outages and water shortages throughout the state. The regulators released a joint letter outlining actions institutions could take “to meet the financial services needs of their communities” … The White House this week announced several measures to ensure the smallest firms have access to loans made through the Small Business Administration’s (SBA) Paycheck Protection Program (PPP). The measures include an exclusive 14-day application window (starting Feb. 24) for firms with fewer than 20 workers, a revised loan calculation, and funding set-aside for sole proprietors and self-employed individuals and new eligibility for businesses owned by those with certain felony convictions.
LINKS:
NASCUS Summary: NCUA Request for Information, Communications & Transparency
(Feb. 26, 2021) Final rules on subordinated debt and corporate credit unions were finally published in the Federal Register this week, completing the action on the final rules and opening the comment period on the proposal.
The rule on subordinated debt takes effect Jan. 1, 2022; the rule on corporate credit unions takes effect the same date.
Adopted in December by the NCUA Board, the subordinated debt rule would allow well-capitalized FICUs to count subordinated debt as capital for risk-based net worth purposes.
Key provisions of the rule include:
- Permission for low-income-designated credit unions (LICUs), complex credit unions, and new credit unions to issue subordinated debt for purposes of regulatory capital treatment.
- A maximum maturity of 20 years to be imposed on debt issued (with a minimum maturity of five years), and a minimum denomination of $100,000. The agency noted the maturity limit helps to clarify that the financial instruments issued are debt – and not equity in the credit unions (which is solely owned by the members; credit unions do not issue stock).
- Prohibitions on a credit union from being both an issuer and investor unless the credit union meets certain conditions related to mergers.
- A section addressing new rules and limits for making loans to other credit unions, including investing in subordinated debt at those credit unions.
The effective date of the rule (Jan. 1, 2022) coincides with the implementation of new risk-based capital rules for credit unions.
The corporate rule, proposed a year ago (in February 2020) included a section on allowing corporate credit unions to purchase subordinated debt from credit unions. The bulk of the corporate rule was adopted as a final regulation by the NCUA Board in October – however, the portion on purchase of subordinated debt was left out of the final rule. The board said then it would adopt that portion of the rule once it had finalized the subordinated debt final rule. Since that rule was adopted in December, the board has now finalized the subordinated debt portion of the corporate rule.
The final rule now makes clear that corporate credit unions may purchase subordinated debt instruments issued by natural person credit unions. The final rule also specifies the capital treatment of these instruments for corporate credit unions that purchase them.
LINKS:
Final rule: Subordinated Debt
Final rule: Corporate credit unions
(Feb. 26, 2021) NCUA this week published its regulatory review roster for 2021, listing the one-third of its rules that it is reviewing – part of the three-year review plan by the agency.
NASCUS annually provides comments on the review and plans to do so again this year.
Under the review plan, the agency’s Office of General Counsel maintains a rolling review schedule of one-third of NCUA rules each year, and seeks public comment on those.
Among the rules being reviewed this round: Security program, report of suspected crimes, suspicious transactions, catastrophic acts and Bank Secrecy Act compliance (Part 748 of the agency’s rules); Golden parachute and indemnification payments (Part 750); Registration of residential mortgage loan originators (Part 761); Rules of NCUA Board procedure, promulgation of NCUA rules and regulations, public observation of NCUA Board meetings (Part 791); and Post-employment restrictions for certain NCUA examiners (Part 796).
LINK:
NCUA 2021 Regulatory Review
(Feb. 26, 2021) A comment letter supporting NCUA’s proposed rule about credit union exemptions from filing suspicious activity reports (SARs) has been submitted by NASCUS, which also some recommendations for changes in the proposal.
The letter supports NCUA’s proposed rule on the Bank Secrecy Act (BSA) providing the agency leeway to grant federally insured credit unions (FICUs) exemptions from NCUA rules implementing SAR filing requirements. More specifically, in its proposal, the agency suggested that innovative approaches and technological developments in the areas of SAR monitoring, investigation and filings may involve a variety of techniques, including automated form population, automated or limited investigation processes and enhanced monitoring processes
NASCUS wrote that emphasizing substantive SAR results over procedural compliance will result in “SAR data that is potentially of greater use to law enforcement and national security stakeholders and is consistent with the intent and spirit of the BSA.”
The association made recommendations for improvements in the proposal, intended to clarify the rule and reduce regulatory burden for credit unions. Among those recommendations:
- Commit to consulting with the appropriate state regulator when evaluating a request for an exemption;
- Clarify what “classes” or “select groups” may apply for an exemption or have a third party apply for an exemption on their behalf from certain SAR filings;
- Specify to which NCUA office to send a request for exemption.
“NASCUS and state regulators remain committed to working with stakeholders and with NCUA to ensure the credit union system is protected from bad actors that would seek to exploit that system in furtherance of criminal enterprise,” NASCUS wrote. “We strongly encourage NCUA to consider how the exemption process will be implemented within the context of affiliated or collaborating credit unions such as in shared branches or services centers, centralized CUSO compliance, and shared back-office situations.”
LINK:
NASCUS Comment letter: Proposed Rule: Bank Secrecy Act – RIN 3133–AF25
(Feb. 19, 2021) No premium – for now — is in the works for credit unions to pay to bring the federal credit union savings insurance fund back up to its “normal operating level,” but that could change after June, according to a discussion held by NCUA Board members Thursday.
“We may no longer be able to avoid it,” NCUA Board Chairman Todd Harper said about a future premium for credit unions. “It’s no longer a question of if, but when and how much” of a premium will be charged. He added that, whatever decision the board ultimately makes about a premium, it will be data driven – and the result of consensus among the board members, himself, Vice Chairman Kyle Hauptman and Member Rodney Hood.
During a briefing on the current equity ratio of the National Credit Union Share Insurance Fund (NCUSIF) – which describes the total reserves in the fund relative to the total credit union savings insured – the board was told the ratio at year-end 2020 stood at 1.26% — six basis points (bp) below that projected by NCUA in September.
The 1.26% equity ratio is also 12 basis points (bp) below the “normal operating level” (NOL) of the fund that is set by the agency board. The NOL is the reserve level at which the board has determined the fund can adequately cover any losses presented to the fund.
Looking ahead, the board was told by staff during the briefing, more savings are expected to flow into credit unions in the coming months, continuing a trend that surfaced last year, and spurred in 2021 by another federal economic stimulus package now in the works by Congress. (The stimulus is meant to counter the financial impact of the ongoing coronavirus crisis.) Meanwhile, earnings on the fund’s reserves are expected to remain reduced, reflecting the low-interest rate environment. The result: continued downward pressure on the NCUSIF equity ratio, making it more difficult to reach the NOL by this summer, the next time the board hears a report on the equity ratio.
NCUA Chief Financial Officer Eugene Schied, during the presentation, noted that credit unions will adjust their 1% deposits in the insurance fund (collected in April), which will total about $866 million. He said that would result in about a 5 bp bump to the equity ratio – which, when added to year-end’s equity ratio, is still well below the NOL, and will also be affected by any increase in savings in insured by mid-year.
Schied said (in answer to a question from Todd Harper), however, that it is still too early to tell where the equity ratio will be as of June 30. Nevertheless, staff agreed with Harper that the trendline for the equity ratio has been going down since 2018.
LINK:
NCUA Board Briefing: Share Insurance Fund Quarterly Report.
Harper comments at 2/18/21 NCUA Board meeting, re: NCUSIF
(Feb. 19, 2021) While four funds administered by NCUA all earned unmodified or “clean” audit opinions for 2020, the agency’s inspector general still outlined a number of 2021 challenges for credit unions that could have an impact on continuing that audit performance, according to a report issued this week.
The agency said its auditor, KPMG LLP, issued unmodified opinions for the National Credit Union Share Insurance Fund (NCUSIF), the agency’s operating fund, the Central Liquidity Facility (CLF), and the Community Development Revolving Loan Fund (CFRLF).
In issuing the audit opinions, the agency’s office of inspector general (OIG) also outlined as the major challenges in 2021 for credit unions (and the funds) to be: cyber threats, technology-driven changes to the financial landscape, interest-rate risk, membership trends, and a recovery from the coronavirus crisis.
“We believe the economy and credit unions’ recovery from the COVID-19 pandemic will be the NCUA’s greatest management challenge going forward in 2021 and possibly beyond,” the OIG report states.
“Even if the economy continues to recover as expected, the operating environment for credit unions over the next two years could prove to be more difficult than in prior years, and credit union performance could deteriorate,” the report adds. “Credit unions should plan for a range of economic outcomes that could affect their performance and resource needs.”
In the other areas, the report notes:
Cyber threats: “Credit unions’ increasing use of technology exposes the credit union system to increasing cyber-attacks. Specifically, malware, ransomware, distributed denial of service (DDOS) attacks, and other forms of cyber intrusion affect credit unions of all sizes and will continue to require ongoing measures for containment,” and pose significant dangers to the safety and soundness of credit unions, according to the report. The report urges credit unions to continue to harden, monitor, and enhance the security of their systems.
Technology changes: In addition to products that pose competitive challenges to credit unions by mimicking deposit and loan accounts (mobile payment systems, pre-paid shopping cards, peer-to-peer lending), credit unions will also face challenges from financial technology (fintech) companies in underwriting and lending, the report asserts. “Fintech companies may be able to automate these services at a cost below levels associated with more traditional financial institutions but may not be subject to the same regulations and safeguards that credit unions and other traditional financial institutions face. As these companies and products gain popularity, credit unions may have to be more active in marketing their products and services and rethink their business models.”
Interest-rate risk (IRR): NCUA and credit unions will need to focus on managing and mitigating interest-rate risk, the report states. Deposit rates have fallen since the start of 2020 and will likely remain low, pressuring credit unions to offer competitive deposit rates to avoid deposit attrition. Meanwhile, credit unions that rely primarily on investment income may find their net income remaining low or falling.
Membership: NCUA and credit unions face the challenge of an aging demographic, the report states, “and unfortunately, these same membership concerns continue.” The report claims that although overall credit union membership continues to grow strongly, close to half of federally insured credit unions had fewer members at the end of the third quarter of 2020 than a year earlier. “All credit unions need to consider whether their product mix is consistent with their members’ needs and demographic profile,” the report states.
LINK:
NCUA’s Four Funds Receive Clean 2020 Audit Opinions
(Feb. 19, 2021) In other action Thursday, the NCUA Board unanimously approved a final rule on joint ownership share accounts, and heard a report on the new Emergency Capital Investment Program (EICP) established for financial institutions under legislation late last year.
The final rule on joint ownership share accounts, proposed by the board last May, would allow account records information other than a signature card to support the insured status of a joint ownership share account in a credit union. The final rule provides federally insured credit unions with an alternative method to satisfy the membership card or account signature card requirement, the agency said. “For example, under the final rule, the signature card requirement can be satisfied by the credit union having issued a mechanism for accessing the account, such as a debit card, to each co-owner or evidence of usage of the joint share account by each co-owner,” NCUA said.
NASCUS, in its comment supporting the proposal last year, wrote that providing federally insured credit unions flexibility in satisfying the signature card requirement with information in joint account records acknowledges that account opening practices have evolved substantially over the last nearly 50 years. NASCUS agreed with the proposal’s overall approach – and offered a modest change: replacing the phrase “such as” with “including, but not limited to.” Doing so, NASCUS wrote, would allow NCUA to “make clear on the face of the regulation that other evidence in the account records may be sufficient to establish qualifying joint ownership of a share account.”
Harper was commended by NASCUS’ Lucy Ito for considering state laws and rules in the agency’s deliberations over the final rule. The rule takes effect 30 days after publication in the Federal Register.
The board also heard a report on the new EICP, which was established by the Consolidated Appropriations Act, 2021, (adopted late last year) to encourage low- and moderate-income community financial institutions (such as federally insured CDFIs or MDIs that are in sound financial condition) to augment their efforts to support small businesses and consumers in their communities. The program contains $9 billion appropriated to Treasury to fund the program. For credit unions to participate, they may only issue subordinated debt to Treasury with a specified aggregate principal amount.
Eligible state-chartered credit unions must apply separately to (a) Treasury for access to ECIP funding and to (b) either their state regulator (state charters) or to NCUA (federal charters) for secondary capital approval.
LINKS:
Final Rule, Part 745, Joint Ownership Share Accounts
Board Briefing, Consolidated Appropriations Act, 2021, Emergency Capital Investment Program