(Nov. 25, 2020) With changes coming to the membership of the NCUA Board, NASCUS believes now is a good time to consider some changes in how the NCUA Board is constructed – namely, requiring that at least one member of the board have state credit union regulator experience, and increasing the size of the NCUA Board from three to five members.
NASCUS and the state system have long advocated the changes.
“A board member who has served as a state credit union regulator would ensure that the state perspective is considered in the board’s deliberations, establish diversity of voices and better foster a robust dual charter system,” said NASCUS’ Ito. “State-chartered credit unions represent 50% of all credit union assets nationwide. The majority of state-chartered credit unions are federally insured. Without at least one board member with state credit union regulatory experience, NCUA is prone to a federal credit union bias as both the chartering body for federal credit unions and insurer of both federal and state credit unions.”
Increasing the size of the NCUA Board from three to five members would allow for better communications among the members without triggering formal meeting requirements (under the federal open meetings laws), and would raise the quality of debate, exchange of perspectives and transparency of operations, Ito said.
“Governance best practice recognizes that too few directors can pose the risks of less transparency and a concentration of power,” Ito said. “Indeed, NCUA credit union rules require federal credit unions to have at least five board members for these reasons.”
Making the changes won’t be as simple as flicking a switch, Ito noted: Congress will have to amend the Federal Credit Union Act to realize both. “However, the state system believes that, going forward, these changes will benefit the agency and the overall credit union system,” Ito said. “We pledge to work with any and all members of Congress to help them adopt these changes.”
(Nov. 25, 2020) NASCUS President and CEO Lucy Ito expressed the state system’s thanks to McWatters for his efforts as both a member and chairman of the NCUA Board for more than six years. “During his tenure, particularly as chairman of the board, Mark was receptive and responsive to the views and ideas of the state system,” Ito said. “For example, he was the first board member in 20 years to objectively assess the old, opaque overhead transfer rate (OTR) methodology and challenge the agency to do more than tweak it, which resulted in a complete overhaul of the methodology to be more fair, more equitable, and more transparent. In a number of other areas – notably risk-based capital and, especially, subordinated debt – Board Member McWatters carefully listened, concisely analyzed, and fairly evaluated the needs of the state system, as well as the entire credit union community. We thank him for his service, and wish him well going forward.”
(Nov. 25, 2020) A proposal to modernize NCUA rules on derivatives, particularly to make it more “principles based” has been summarized by NASCUS and posted on the association’s website. The summary is available to members only.
The proposal, according to NCUA on Oct. 16 when the board approved its release for a 60-day comment period, is designed to provide more flexibility for federal credit unions to manage their interest rate risk (IRR) through the use of derivatives, while retaining key safety and soundness components.
The agency also said on proposal that the changes would “streamline” the rule and give credit unions more authority to purchase and use derivatives for managing interest-rate risk. The proposal also, NCUA said, reorganizes rule content related to loan pipeline management into one section, which it said would aid in readability and clarity.
NASCUS CEO Ito emphasized at the time the rule was proposed that state credit union derivative authority properly rests with state supervisors, and that they have the experience to apply that power. She noted that state supervisory authorities have extensive experience with derivatives and interest rate swaps both in state-chartered credit unions and community banks, and can play a role as the final rule is developed applying their experiences and lessons to the rule-making.
She also described NCUA’s move to streamline its derivative regulation as “pro-active in anticipation of increased interest rate risk given current low-rate environment and likely long-term rate increases.”
LINK:
Summary: NCUA Proposed Rule (FCUs Only); Derivatives Part 703 (members only)
(Nov. 25, 2020) An “S” component (for market sensitivity) in the CAMEL examination rating system remains on the radar for NCUA in 2021, especially now that the agency’s information systems are being updated through the Enterprise Solutions Management (ESM) program.
According to a semiannual report to Congress by the agency’s Office of Inspector General (OIG) made public recently (reporting on agency activities from April 1 to Sept. 30), the addition of this component – S, which will turn the CAMEL rating system into CAMELS – will require revision to the liquidity component (L) to only include liquidity content and criteria, not interest-rate risk.
“(NCUA) Management indicated that adopting the ‘S’ (Market Sensitivity) for the CAMEL rating system involves public notice and comment, NCUA Board approval, and cohering regulation, examination procedures, and system changes,” the report states. “As part of the Enterprise Solutions Modernization program, NCUA is updating the examination platform to incorporate the ability to assign and capture the ‘S’ component as an optional part of the CAMEL rating. Management indicated they expect to have this system change in place in 2021.”
The report also states that agency management noted that the system change will provide the agency the flexibility to adopt the “S” rating if the Board so chooses, and to capture the “S” rating for federally insured state-chartered credit unions in the states where the state regulators adopted the “S” rating.”
NASCUS, which supports including the component in the agency’s rating system, has determined that at least 24 states have already adopted it in their rating system. NASCUS’ Ito said the state system also commends NCUA Chairman Hood for his consistent interest in state agency supervisory practices in adopting the “S” rating for credit unions. “The ‘S’ rating is more relevant than ever since credit unions will face growing interest rate risk as the Federal Reserve eventually allows rates to rise in concert with economic recovery that takes place in the coming years,” she said.
LINK:
NCUA Semiannual Report to Congress (April 1–September 30, 2020)
(Nov. 25, 2020) Change is coming to the NCUA Board in the next 10 days or so, following change that already occurred late last week with the resignation of one of the board members. Here’s a quick rundown of what happened late last week, what’s scheduled to happen next week, and a look at what may be ahead for leadership of the agency.
- Last week, Senate Majority Leader Mitch McConnell (R-Ky.) announced (via the Senate’s executive calendar, which lists when executive branch nominees will begin to be considered by the Senate) that the nomination of Kyle S. Hauptman to be a member of the NCUA Board would be considered as early as Monday of next week (Nov. 30). Hauptman was nominated by outgoing President Donald Trump (R ) last summer to take the seat of J. Mark McWatters, whose term expired in August 2019; McWatters has been serving in a holdover capacity until his successor (Hauptman) was confirmed by the Senate. McWatters is a former chairman of the NCUA Board (succeeded by current Chairman Rodney Hood last year), who was named to that position by Trump.
- On Thursday, during the regular monthly meeting of the NCUA Board, both Board Members McWatters and Todd Harper expressed some dissatisfaction with the proposed NCUA budget for 2021, which is scheduled to be the subject of a Dec. 2 briefing by the agency (and which NASCUS has requested to provide comments for). McWatters also announced that he would not support the 2021 staff budget as drafted “as long as I’m on this board.” The NCUA Board is scheduled to consider the 2021 budget at its next monthly meeting, set for Dec. 17.
- Late Friday, McWatters released a copy of a letter he said he had sent to Trump that day informing the president that he was submitting his resignation. “As the Senate is scheduled to confirm my successor in the next few days, I hereby resign my position as of today,” McWatters wrote.
- Monday, Hood publicly released a statement noting McWatters’ resignation, observing that “his years on the NCUA Board are a credit to his decades-long career in law and policymaking. I wish Mark all the best in his future endeavors.” (NCUA Board Member Todd Harper – who also voiced concerns about the budget – released a statement on social media reading (in part) “Mark leaves the Board with a commendable record of achievement, and I wish him well in his future endeavors.”)
The end result of all of this: When the NCUA Board meets Dec. 17 to consider the 2021 budget – including the overhead transfer rate (OTR) for the NCUSIF portion of the agency spending plan – there could be one new face on the board, and perhaps two votes in favor of the agency’s budget for next year.
Looking ahead, with the transition of President-elect Joseph R. Biden (D) now officially underway in advance of the Jan. 20 transfer of power from Trump, there is likely to be more change. The new president will be in a position to designate a new chairman of the NCUA Board (that position is not confirmed by the Senate if the individual has already been confirmed as a board member). As the only Democrat-appointee on the board, Harper is in line to become the next NCUA Board chairman if the president decides to take action.
The most recent example of the president tapping a member of his own party to be chairman: McWatters was named acting chairman of the agency board by Trump on Jan. 26, 2017 – six days after taking the oath of office as president. McWatters replaced Rick Metsger who remained on the board (ultimately to be succeeded by Hood). The “acting” part of McWatters’ title was removed by Trump in June of that year.
Harper’s term on the board ends in April; however, he may serve on the board until a successor is confirmed by the Senate. Hood’s term ends in August 2023; Hauptman, if confirmed, would inherit a term that runs to August 2025.
(Nov. 20, 2020) NCUA joined the federal banking agencies Thursday in releasing a fact sheet meant to clarify Bank Secrecy Act due diligence requirements for credit unions and banks that offer services to charities and non-profits. The fact sheet, the agencies said in a release, highlights the importance of legitimate charities and nonprofit organizations having access to financial services. It also addresses the ability of those groups to transmit funds through legitimate and transparent channels, especially in the context of responding to the coronavirus. Further, the agencies said, the fact sheet clarifies that charities and nonprofit organizations as a whole do not present a “uniform or unacceptably high risk of being used or exploited for money laundering, terrorist financing, or sanctions violations, and that banks and credit unions must develop risk profiles that are appropriate for the risks presented by each customer” … With the Thanksgiving holiday coming up next week, look for NASCUS Report to be published on Wednesday, rather than Friday as per usual.
LINK:
Agencies release fact sheet clarifying BSA requirements with charities, non-profits
(Nov. 20, 2020) Prohibiting the authorization of additional advances to finance unpaid interest may be overly burdensome, the NCUA Board has reasoned, and it wants to remove that ban with a proposed rule it issued unanimously Thursday.
The proposal, staff told the board, emerged from the financial impact of the coronavirus crisis as members struggled to stay current on their mortgage and other loans.
Removing the prohibition on the capitalization of interest in connection with loan workouts and modifications, the board said in its proposal, 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.”
The proposal suggests that advancing interest may avert the need for alternative actions that would be more harmful to borrowers. “The proposed rule would establish documentation requirements to help ensure that the addition of unpaid interest to the principal balance of a mortgage loan does not hinder the borrower’s ability to become current on the loan,” the board said in the proposal. “The proposed change would apply to workouts of all types of member loans, including commercial and business loans.”
The proposed rule was issued for a 60-day comment period.
LINK:
Proposed Rule, Part 741, Appendix B, Capitalization of Interest
(Nov. 20, 2020) In other action at its Thursday meeting, the NCUA Board:
- Reallocated $4.3 million in its budget for COVID-related “costs and opportunities.” The agency said the reallocation – from unspent 2020 travel budgets for the agency – were needed due to increased expenses from information technology costs that support offsite examinations and remote work by agency staff. The agency also said the reallocation would be used to pay for a “pull forward from the 2021 budget” of a previously planned renovation of NCUA headquarters while much of the workforce is offsite.
- Heard a report on credit unions’ use of the voluntary diversity self-assessment. Staff noted that the credit union response rate in submitting the self assessment has risen each year since it was unveiled in 2016, when 35 responded. In 2019, 118 FICUs responded (2.3% of all credit unions). The agency said it continues to urge more credit unions to commit to filling out self-assessment, pointing out that it has nothing to do with the credit union examination process.
LINKS:
NCUA 2020 Budget Update
State of Credit Union Diversity, Equity and Inclusion
(Nov. 20, 2020) Two federal banking agencies saw action for their leadership futures this week, as a nominee for one barely failed to be confirmed to the position and another was nominated for a permanent position.
However, further progress for the two candidates – at the Federal Reserve and OCC, respectively — seems doubtful at this stage.
Meanwhile, the Senate could consider the nomination of Kyle S. Hauptman for the NCUA Board as early as the week following Thanksgiving.
On the Federal Reserve nomination: The Senate failed to confirm nominee Judy Shelton on a vote of 47-50, which was marked by bipartisan opposition to her confirmation. Shelton has proved to be a controversial candidate to sit on the central bank board: in the past, she has drawn controversy and some criticism for her expressed views about reinstituting the gold standard, questioning the effectiveness of federal deposit insurance, and the Fed’s independence from political influence.
Republican senators had vowed to consider her confirmation again (which was hobbled the first time by three senators outright expressing or voting in opposition to her, and others not available to vote after quarantining for Covid-19 exposure or infection). However, the Senate recessed Wednesday evening for the Thanksgiving holiday and won’t return until the afternoon of Nov. 30 (the Monday after Thanksgiving). That timing places Shelton’s confirmation in further doubt – on that day, the Democrats gain an additional member, Senator-elect Mark Kelly (Ariz.), who won a special election over incumbent Martha McSally (R ) Nov. 3. All Democrats have vowed to oppose Shelton’s confirmation.
On top of that, time is running short for the Senate to consider her nomination again in the coming weeks, as the current Congress winds down (and the Christmas and New Year holiday breaks loom). The new Congress will take its seats Jan. 3.
Also this week, President Donald Trump nominated Acting Comptroller of the Currency Brian P. Brooks to take the job (that is, remove the “acting” from his title) for a five-year term. Brooks was appointed to his current position by Treasury Secretary Stephen Mnuchin; he was not been confirmed by the Senate.
But the outlook for Brooks’ confirmation is similar to Shelton’s, with an added twist: In addition to growing Democratic opposition, and a dwindling calendar, Brooks will be subject to a Senate Banking Committee hearing on his nomination before he can be considered by the full Senate. Ranking Member Sherrod Brown (Ohio) has already questioned Brooks’ qualifications for the comptroller’s job; Brooks has held the acting title only since late May, and joined the OCC in April.
Nevertheless, press reports indicated late this week that Senate Banking Committee Chairman Mike Crapo (R-Idaho) intends to hold a hearing on the Brooks nomination. Further, reports also indicated that the Senate is also preparing to take up the confirmation of another (less controversial) Federal Reserve Board nominee, Christopher Waller, before Congress ends.
Meanwhile, late this week (after the Senate had already recessed for the holiday), the Senate leader published his Executive Calendar for Monday, Nov. 30 – which includes consideration of cutting off debate on the nomination of Kyle S. Hauptman to take a seat on the NCUA Board. President Trump tapped Hauptman in June to take the seat now held by Board Member Mark McWatters. He has been serving in a holdover capacity since his term expired in August, 2019.
LINK:
Senate Executive Calendar, Nov. 20, 2020
(Nov. 20, 2020) A premium for the federal credit union savings insurance program for this year is unlikely, but the outlook for next year and beyond is not so clear following conversation by members of the NCUA Board on Thursday.
Meeting for their regular monthly meeting for November, the three NCUA Board members heard a quarterly report on the National Credit Union Share Insurance Fund (NCUSIF) that showed the assets of the fund grew significantly in the third quarter. However, that was largely because credit unions adjusted their deposits in the fund to be equal to 1% of insured shares. Total assets expanded to more than $19 billion from midyear, fueled largely by more than $1.5 billion injected by federally insured credit unions to adjust their 1% deposits.
Nevertheless, all three board members advised vigilance by federally insured credit unions going forward. NCUA Board Chairman Rodney Hood said the agency would take “all necessary actions” to ensure the fund remains strong and retains public confidence. “Vigilance needed to manage, monitor the situation.”
But NCUA Board Member Todd Harper agreed, saying that the agency must be “on guard” going forward. However, he noted that with rising assets, falling loan demand, compressed interest rates, decreased earnings and subdued consumer confidence under the pandemic-affected economy, credit unions need to be prepared for increased member delinquencies, loan defaults, bankruptcies and even credit union failures.
“We have a number of higher-risk credit unions that we were already closely supervising,” Harper said. “So it seems very likely that we will see higher than average failures over the next two years. What is more, we also know that growth in credit union assets seems likely to continue to exceed the ability of the share insurance fund to earn interest given the new reality of very low interest rates for the next few years.”
He said because the insurance fund equity ratio will continue to drop and decline, “it is really not a question of whether we will charge an insurance fund premium, but a question of when.” He indicated the timing is uncertain for a premium – next year, or even the year after that. However, he said bluntly: “Credit unions need to brace themselves for that eventual reality,” adding later that charging a premium during an economic downturn is “less than optimal.”
Harper reiterated past comments about the need for the agency to work with Congress about modifying the way the agency manages the fund going forward. He noted the FDIC’s higher reserve requirements for banks, greater administrative flexibility, and the ability to charge risk-based premiums as ripe for consideration for NCUA and credit unions.
Board Member Mark McWatters took a similar tack to Harper’s, saying he remains focused on the equity ratio of the fund. Under federal law, the NCUA Board may charge a premium if the equity level of the fund drops below 1.3%; if the equity ratio falls below 1.2%, the law demands a restoration plan that include a premium to help bring the equity back above 1.3%
McWatters indicated he wants credit unions to be prepared – and recommended that NCUA modify its policy to present a transparent calculation of the equity ratio each month (rather than every six months), with a detailed analysis of the numerator and denominator of the fraction that describes the insurance fund equity. (As of now, the agency will next calculate the equity ratio based on Dec. 31, 2020, credit union financial results.)
“The public dissemination of this information is of particular relevance as the COVID pandemic rages, and the resulting stresses on the credit union community and the insurance fund continue,” McWatters said. He added that the agency should also work with all constituencies to “address these critical issues in a transparent matter so as to mitigate the need for future premium assessments” in the context of the financial impact of the pandemic on CUs.
LINK:
NCUSIF Financial Statistics For the Quarter Ended September 30, 2020
(Nov. 20, 2020) NASCUS’ Lucy Ito expects to present the state credit union system view on the next NCUA budget – particularly its impact for the overhead transfer rate (OTR) – when the agency holds its annual budget briefing Dec. 2.
Late last week, the agency published its 2021-22 draft budget – totaling $342.5 million in 2021 and $364.2 million in 2022 – which will be the subject of the Dec. 2 briefing. The agency’s final budget is slated for approval during the NCUA Board’s Dec. 17 open meeting.
The agency primarily funds its operations through two sources: fees charged to federal credit unions (the FCU “operating fee”), and through funds transferred from the National Credit Union Share Insurance Fund (NCUSIF) to pay for “insurance-related costs” of the agency.
Budget documents posted on the agency’s website late last week show a total proposed 2021 budget of $342.5 million –down about $4.9 million, or 1.4%, from the approved budget of $347.4 million for 2020.
But that reduction would be more than made up in 2022, when the agency projects a 6.3% increase in its total budget, for a total of $364.2 million. That figure includes a $341.8 million operating budget (up $26.2 million); a $14.6 million capital budget (up $4.3 million); and $7.9 million NCUSIF administrative budget (down $218,000).
To fund its 2021 budget, the agency is estimating an OTR of 62.3% — one percentage point higher than in 2020 – with the remaining 37.7% of the budget to be paid largely by FCU operating fees. In its published budget, NCUA states that the primary driver of the increase in the estimated 2021 OTR is the rise in examination and supervision time for federally insured state-chartered credit unions.
“Calendar year 2021 marks the end of the first, five-year cycle associated with the Exam Flexibility Initiative that extended the NCUA exam time for eligible institutions,” the budget states. “The increase in budgeted time for FISCU examination and supervision for 2021 is due to program obligations associated with examination scheduling and scope requirements.”
NASCUS has voiced its concern over the years that the operations of the agency not be funded primarily by the insurance fund. In fact, in a comment letter to the agency earlier this month, NASCUS pointed out the “incontrovertible truth” that doing so means the insurance fund has less resources to face financial troubles for credit unions, unless an insurance fund premium is assessed, which is not outlined in the 2021 budget.
In fact, the 2021 budget proposal is already facing some headwinds: At the NCUA Board meeting Thursday, Board Member Mark McWatters said he does not support the proposal put forth by the staff. He said the budget proposal inappropriately omits some items, and funds other items that are not necessary for ensuring the safety and soundness of credit unions.
He did not outline the specific items in either case. However, last year, McWatters said he intended to pursue a “collegial, collaborative” path for adding consumer protection resources at the agency for the 2021 budget (such as additional staff). That, apparently, did not happen and is at least partly responsible for McWatters’ stated opposition.
The Dec. 2 budget briefing is scheduled to last one hour; it gets underway at 10 a.m. and will be live-streamed via the Internet.
LINK:
NCUA 2021/2022 Budget Justification
(Nov. 13, 2020)Despite the financial impact of the coronavirus crisis, federally insured credit unions performed well and remain well capitalized – although there are still challenges ahead, NCUA Board Chairman Hood told Senate and House committees this week.
Hood also made a legislative request: that the authority in the Coronavirus Aid, Relief, and Economic Security (CARES) Act given to NCUA to respond to the pandemic – particularly that providing expanded flexibility and borrowing authority to the agency’s Central Liquidity Facility (CLF) – should be extended to the length of the pandemic. The authority under the CARES Act is now set to expire at year’s end.
In reporting on the state of credit unions, Hood said they were well capitalized at the start of the pandemic, with high levels of net worth and ample liquidity. He noted that federally insured credit unions (FICUs) increased their net worth by $11.6 billion, or 6.8%, over the year ending June 2020, to $182.9 billion. He said asset growth led to a decline In the aggregate net worth ratio – net worth as a percentage of assets – from 11.27% to 10.46%. “Still, the credit union system remains well capitalized through June 2020,” Hood said.
But he also reported that the effects of the economic downturn will affect credit union performance through year’s end and into 2021. “System-wide delinquency rates, which remained low through the second quarter, could begin to rise as forbearance programs end, particularly given the current high level of unemployment. Interest rates across the maturity spectrum have fallen to historically low levels,” he said. “A prolonged period of low interest rates also poses risks, particularly to credit unions that rely primarily on investment income.”
NCUA is actively monitoring economic conditions and assessing these and other risks to credit unions and their members, he said.
In seeking extended authority for the CLF, Hood noted a number of changes the CARES Act made for the CLF when the law was enacted last March (including higher borrowing authority, relaxed membership for corporate CUs, more clarity about what borrowed funds can be used for). He indicated credit unions have responded well to the changes, with new memberships adding $989.8 million in additional capital stock (since April), borrowing authority increased by $21.7 billion to $32.2 billion, and 80% of all federally insured credit unions (4,145 in total) now having access to the facility.
Securing the extension of the authorities, Hood said, would “provide regulatory certainty to credit unions. Having a reinforced CLF will also ensure the credit union system can continue to support its members and communities should the need for emergency liquidity arise.”
NASCUS commented in favor of changes to the CLF in a comment letter on an interim final rule the association filed in June, implementing provisions of the CARES Act.