(Nov. 13, 2020) Last week’s election results – in which Democrat (and former vice president) Joseph R. Biden claimed more electoral votes than Republican (and incumbent) President Donald Trump, as well as more than 5 million more actual votes — will have an impact on federal regulation of credit unions, likely beginning with who sits in the top regulators’ seats.

For NCUA, the result could mean a change who leads the agency. The chairman of the NCUA Board is designated by the president (not confirmed by the Senate if already sitting on the board), and does not serve a set term in that role, other than their term as a member of the board. Current credit union regulator board Chairman Rodney Hood (appointed by Trump) could be displaced by Biden in favor of a Democrat, as early as January following inauguration. Hood’s term on the board runs to August 2023. Board members may not succeed themselves.

The only Democrat currently on the board is Todd Harper, whose own term ends in April. Biden could name Harper board chairman, and then nominate another Democrat to take his place sometime after April. Harper could remain on the board until his successor is confirmed by the Senate.

And there may be more opportunities for the new president. NCUA Board Member J. Mark McWatters (a Republican appointee) is serving in a holdover capacity (since his term ended in August 2019) until the Trump nominee for his seat, Kyle Hauptman, is confirmed by the Senate. Hauptman’s nomination is currently pending before the Senate, after a split vote by the Senate Banking Committee to recommend confirmation. (Senate Democrats, on a voice vote, voted no.)

But a vote on Hauptman’s nomination has not yet been scheduled by the Senate. If the Senate fails to act before the current session ends in early January (and the current Congress with it), his nomination will come to an end – and Biden will have another seat to fill on the board, likely with a Democrat. (However, there is still plenty of time between now and Jan. 2 for the Senate to take up and act on Hauptman’s nomination.)

Meanwhile, the CFPB director’s job, now held by Kathleen Kraninger, will be up for change under a Biden administration – thanks to a Supreme Court decision just this year which ruled the director of the agency holds the job “at will” of the president, and is not only subject to “for-cause” firing, despite the five-year term the director fills once confirmed. Kraninger’s term runs to 2023.

Democrats in both the House and Senate have been roundly critical of Kraninger’s performance as director, and will likely argue that the new administration should make a change.

(Nov. 13, 2020) NCUA’s new, revised rule on corporate credit unions – addressing at least five key areas in current rules, including permitting the institutions to make a minimal investment in a credit union service organization (CUSO) – takes effect Dec. 14, after publication of the final rule Thursday (Nov. 12) in the Federal Register.

Adopted at the agency board’s Oct. 15 meeting, the revised corporate regulation is generally aimed at clarifying a number of provisions already in agency rules. NASCUS largely supported the revisions when proposed, although the association made some suggestions for improving or refining the regulation.

Among its key provisions, the rule:

permits (as noted) a corporate credit union to make a minimal investment in a credit union service organization (CUSO) without the service organization being subjected to heightened agency oversight.
expands the categories of senior staff positions at member credit unions eligible to serve on a corporate credit union’s board.
removes the “experience and independence” requirement for a corporate CU’s enterprise risk management (ERM) expert.
clarifies the definition of a collateralized debt obligation.
simplifies the requirement for net interest income modeling.

Given that six of 11 corporate credit unions are state chartered, the rule has the potential for an important impact on the state credit union system. As NASCUS President and CEO Lucy Ito noted last month when the rule was finalized, provisions such as enabling corporate CUs to make minimal investments in a CUSO without triggering a “corporate CUSO” classification should enable the credit union system to stay abreast of broader fintech developments.

Unlike the proposal, the final rule does not include provisions addressing subordinated debt at credit unions. Instead, prior to issuing the final rule, NCUA decided to remove those provisions from the final, noting that they would be addressed in a later final rule on subordinated debt. A proposal was issued in January on subordinated debt; the comment period ended in July.

LINK:
Final rule: Corporate credit unions

(Nov. 13, 2020) NASCUS has posted a new summary of a proposal by federal financial institution regulators – including NCUA and CFPB – aimed at clarifying and codifying the role of supervisory guidance. The summary is available to members only.

Voting unanimously at a rare second monthly board meeting Oct. 28, the NCUA Board agreed to join the interagency proposal on the role of supervisory guidance issued by the agencies. Under the proposal, the meaning of “supervisory guidance” would be clarified as meaning, essentially, it doesn’t have the force of law.

If finalized, the proposal would codify an interagency statement issued by all of the agencies in September 2018. That statement was intended to make clear that, unlike a statute or regulation, supervisory guidance is not the same as statute or regulation. “Supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance,” the 2018 statement read.

But some in the financial services industry (most vocally, banks) wanted more than a statement. They developed a petition to the federal banking agencies and CFPB requesting that the statement be adopted by the agencies in the form of the rule. NCUA was not an initial target of the petition but, since the credit union regulator signed on to the original statement, it was obligated to consider signing on to the proposed rule.

When the board considered the proposal two weeks ago, staff asserted that it would not impose a burden on credit unions. That’s at least partially because, they said, the agency has followed the intent of the proposal for at least the last seven years. Staff pointed out that NCUA has, at least since 2013, tied all “documents of resolution” for credit unions to specific statutory and regulatory citations – a practice, the agency staff (and board members) vowed would not change under the proposed rule.

Comments on the proposal are due Jan. 4, following a 60-day comment period.

LINK:
Summary — Interagency Proposed Rule re: Role of Supervisory Guidance

(Nov. 6, 2020) Increases in the overhead transfer rate (OTR – the rate at which dollars transferred from the National Credit Union Share Insurance Fund (NCUSIF) to fund insurance-related costs of NCUA) lead to the “incontrovertible truth” that doing so means the insurance fund has less resources to face financial troubles for credit unions, NASCUS wrote in a comment letter late last week.

That is, unless the agency decides to charge an insurance fund premium, NASCUS indicated.

In its comment letter to the agency on its request for information about the methodologies used to determine the OTR (and the federal credit union (FCU) operating fee), NASCUS noted that the current proposal for next year’s OTR reflects an increase. The association asserted that the allocation of agency expenses to the insurance fund take on a “particular importance against the backdrop of the ongoing pandemic in the United States and resulting economic dislocation.”

NASCUS pointed out that every dollar the agency pulls from the insurance fund to cover the expenses of the agency is a dollar not available to cover credit union losses, such as those resulting from the financial impact of the coronavirus pandemic. It also means that’s a dollar that may need to be replaced in the insurance fund through an insurance premium being charged.

And there are more issues to be considered, the state system declared through NASCUS.

“Furthermore, the allocation of NCUA’s operating expenses and the corresponding effect on FCU chartering fees has the potential to imbalance the dual chartering system by disadvantaging the state system in an inequitable and inorganic manner,” NASCUS wrote.

The state system also noted that for more than 20 years there has been an imbalance in how the agency covers its expenses from the insurance fund through the OTR, forcing federally insured, state credit unions (FISCUs) to “shoulder an inordinate cost of supervising the safety and soundness of the credit union system.” NASCUS pointed to mid-year statistics from federally insured credit unions showing FISCUS holding nearly 50% of all insured shares, but number only 37% of the federally insured credit unions. Put another way, NASCUS wrote, FISCUs pay half the NCUSIF’s costs but are only 37% of the work.

“Some stakeholders are apt to assert that FCUs pay an aggregate greater amount of NCUA’s overall budget when the total expense to FCUs of the operating fee and OTR are aggregated,” NASCUS wrote. “But this assertion ignores the fact that the NCUSIF is NOT expending resources to conduct examinations on a majority of FISCUs because it relies on the exam work conducted by the states — exam work which is paid for entirely by FISCUs.”

Illustrating its point, NASCUS noted that in 2019 nine states sent their examiners to more 6,793 hours of non-NCUSIF funded training, paid for by state credit union fees of more than $25.2 million for examination and supervision in those nine states alone. “A similar story can be told in the remaining 36 state regulatory agencies,” NASCUS wrote.

Two other imbalances lie within the current system, NASCUS pointed out: the OTR is borne by state-chartered CUs in lost NCUSIF dividend opportunity or as additional insurance premium costs (as may be the case in 2021), and an “inverse benefit” for FCUs through application of the OTR.

“The larger the OTR, the more modest the FCU operating fee,” NASCUS wrote. “That inequitable result is one reason why the OTR methodology is so important to the state system.”

In other comments, NASCUS:

Supported including the agency’s budget for capital projects within the annual budget subject to the OTR (although it noted doing so “may not be equitable” in some cases under how it is defined in the methodology).
Disagreed that allocating NCUA work related to CUSOs and other third-party vendors as solely related to the insurance fund is consistent with the principles of the methodology or with the practical reality of a chartering authority. “The allocation of third-party regulatory and supervisory work takes on an enhanced importance given NCUA’s interest in obtaining direct supervisory authority over such entities,” NASCUS wrote. “Should NCUA obtain that regulatory and supervisory authority (which NASCUS supports), ensuring equitable allocation of associated expenses will be essential.”
Deferred comment on providing an incentive (through a discount in operating fees) for FCUs to complete the voluntary diversity self-assessment “So long as there was no corresponding effect on the OTR from any shortfalls in operating fee funding resulting from the proposed discounts.”

LINK:
NASCUS Comment: Request for Comment, OTR and Operating Fee Schedule Methodologies

(Nov. 6 ,2020) Ending an eight-month role as “acting” top supervisor for NCUA, Myra Toeppe has formally been named the director of the agency’s office of examination and insurance, according to a release issued Monday.

Since March, Toeppe has been serving as acting director of the agency’s office of examination and insurance. That position, according to NCUA, ensures the safety and soundness of federally insured credit unions, and manages risk to the National Credit Union Share Insurance Fund (NCUSIF). The release said the NCUA Board unanimously approved her selection as permanent director.

Toeppe replaced as E&I director Larry Fazio, who was named NCUA executive director last spring.

Prior to her role as acting director, Toeppe served nine years in executive positions with NCUA, including as an associate regional director, regional director, and strategic advisor, NCUA said. Before that, the agency said, she served 25 years with the Office of Thrift Supervision and the Federal Home Loan Bank of Atlanta.

She holds a B.S.B.A. and M.B.A. from the University of Central Florida. She is a 2011 graduate of the Stonier Graduate School of Banking and its Wharton Leadership Program; she has completed the Leadership for a Democratic Society Program at the Federal Executive Institute.

LINK:
Myra Toeppe Named Director of the Office of Examination and Insurance

(Nov. 6, 2020) Two webinars – one on fair lending and consumer compliance and another on financial literacy and consumer financial protection for servicemembers – are on the horizon for NCUA (in partnership, for the latter, with CFPB).

On Nov. 17, the credit union agency hosts a “Fair Lending and Consumer Compliance Regulatory Update” at 3 p.m. ET, to run about one hour. According to the agency, the webinar will feature staff from the NCUA’s Office of Consumer Financial Protection discussing focus areas for consumer compliance exams in 2021, including a review of COVID-19-related loan modifications and credit reporting; fair lending policies and procedures; and findings from the 2020 consumer compliance exam reviews.

The following day (Nov. 18), NCUA and CFPB partner on a session covering servicemember financial literacy and consumer protection, which starts at 2 p.m. ET and runs for about 45 minutes, according to both agencies. The “Financial Readiness Resources and Information for Servicemembers, Veterans, and their Families” webinar, featuring NCUA’s Office of Consumer Financial Protection, is scheduled to highlight financial literacy resources for servicemembers and their families (on NCUA’s consumer-facing website, MyCreditUnion.gov), and provide a brief overview of servicemember consumer financial protection laws and regulations.

CFPB’s Office of Servicemember Affairs will highlight its own interactive learning tools and resources for servicemembers and their families, according to the agencies.

Advance registration is required for both; see the links below.

LINKS:
NCUA Hosting Webinar on Fair Lending and Consumer Compliance Updates

Registration Now Open for Webinar on Consumer Financial Protection for Servicemembers

A proposed rule aimed at clarifying and codifying the role of supervisory guidance from federal financial institution regulators was adopted by NCUA this week, joining the federal banking agencies and CFPB in issuing the proposal for comment.

Voting unanimously during a rare second meeting in a month, the NCUA Board joined the banking agencies in issuing (for a 60-day comment period) the proposal on the role of supervisory guidance issued by the agencies. Under the proposal, the meaning of “supervisory guidance” would be clarified as meaning, essentially, it doesn’t have the force of law.

A petition brought by banking industry trade groups in 2018 called on the federal banking agencies and CFPB to go further than a statement in clarifying the role of supervisory guidance. The bank groups specifically urged the agencies to make clear that matters requiring attention, matters requiring immediate attention and other such supervisory actions may only be based on a violation of statute or regulation, and not on a failure to comply with supervisory guidance.

NCUA was not a target of the 2018 petition. However, because the agency joined in the 2018 statement, it had to be involved in the considerations for a proposed rule as required by federal regulatory procedure, according to agency staff.

The FDIC Board issued the proposal for comment last week at a meeting of its board. The CFPB and the OCC followed that action and joined the proposal (both of those agencies’ leaders also sit on the FDIC Board). The Federal Reserve has also jumped on the proposal after its board gave the green light.

That left NCUA as the only agency (as of Wednesday) whose leadership had not yet agreed to join the proposed rule, but that had signed the 2018 statement. It was not for a lack of effort. The agency had planned to consider the proposal at its Oct. 15, but pulled the measure off the agenda just as the meeting began. The reason, according to agency staff: it had not yet received word that the other four regulators had completed any revisions to the proposal.

As Scott Neat, associate director of the agency’s office of examination and insurance, told the board this week: the agencies strive to work closely together on joint rulemaking and to issue their proposals at the same time – but it doesn’t always work out that way. “Timing is seldom simultaneous,” Neat said.

However, he also told the board, to ensure that NCUA can “remain timely in its formal approval process of this proposed rule,” the agency convened the board meeting Wednesday to consider it. Typically, the NCUA Board meets only once a month.

In other comments, staff told the NCUA Board members that the proposal will not create a burden for credit unions. That’s at least partially because, they said, the agency has followed the intent of proposal for at least the last seven years. Staff pointed out that NCUA has, at least since 2013, tied all “documents of resolution” for credit unions to specific statutory and regulatory citations – a practice, the agency staff (and board members) vowed would not change under the proposed rule.

LINK:
Proposed Interagency Rule, Part 791, Role of Supervisory Guidance

Saying he has “reinforced” his commitment to financial inclusion, NCUA Board Chairman Rodney Hood this week announced a new program sponsored by the agency to do just that, by launching the “Advancing Communities through Credit, Education, Stability, and Support” (ACCESS) initiative.

“As Chairman, I have consistently characterized financial inclusion as the civil rights issue of the 21st century,” Hood said in a statement. “There is a clear business case for credit unions to enhance their outreach to underserved and underbanked populations. The NCUA will dedicate resources from across its lines of business to bring more Americans into the financial mainstream and provide them with greater access to safe and affordable financial services.”

NCUA, in its release, said the ACCESS program is designed to assemble leaders within the agency to “refresh and modernize regulations, policies, and programs in support of greater financial inclusion within the agency and the credit union system.” The release stated that the program will build on earlier successes in financial inclusion by NCUA and address the financial services and financial literacy needs of underserved and diverse communities across the U.S, as well as expand opportunities for employment.

“Government agencies can make a vital contribution in terms of coordinating efforts, helping to set appropriate standards, and directing resources where they can make a real difference,” Hood said. “That’s certainly what we’ve been doing and will continue to do at the NCUA.”

Financial inclusion and diversity has lately run into some political headwinds. Last week, 150 business groups – including the U.S. Chamber of Commerce — sent a letter to the White House saying an executive order signed by President Donald Trump in September has had a chilling effect on legitimate diversity and inclusion training and causes confusion among employers. “We urge you to withdraw the Executive Order and work with the business and nonprofit communities on an approach that would support appropriate workplace training programs,” the letter from the group stated.

LINK:
Chairman Hood Reinforces Commitment to Financial Inclusion, Launches ACCESS Initiative

The role of “supervisory guidance” would be clarified as meaning it doesn’t have the force of law in a proposed rule issued this week by federal banking regulators, CFPB and, soon, NCUA.

The FDIC, Federal Reserve, OCC, CFPB and NCUA are all listed on the proposal, which was issued for a 60-day comment period by the FDIC Board at its open meeting this week. The proposed rule, according to its summary, would codify an interagency statement issued by all of the agencies in September 2018. That statement was intended to make clear that, unlike a statute or regulation, supervisory guidance does not have the force and effect of law. “Supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance,” the 2018 statement read.

However, apparently the statement was not enough for some. The American Bankers Association (along with the Bank Policy Institute), filed a petition in 2018 with the banking agencies and CFPB (but not NCUA) calling on them to institutionalize the statement by codifying it in a formal rulemaking. Specifically, according to ABA, the bankers’ groups urged their regulators to clarify that matters requiring attention, matters requiring immediate attention and other such supervisory actions may only be based on a violation of statute or regulation, and not on a failure to comply with supervisory guidance.

This week, the ABA said the proposed rule “codifying” the statement was in response to their petition.

Late Thursday, the NCUA Board scheduled a meeting for next week (Wednesday, Oct. 28 at 2 p.m.) to consider its own rule on “supervisory guidance” (even though the agency was already listed on the proposal issued by the FDIC and the other agencies).

Last week, Chairman Rodney Hood opened the board’s October meeting by announcing the members had agreed to remove from the agenda a proposed “request for information” regarding supervisory guidance review and “improvements in communications.” No reason was given for the removal of the agenda item.

LINK:
FDIC Proposed Rule on The Role of Supervisory Guidance:

In other action Thursday, the NCUA Board issued a proposed rule the agency said would streamline its regulations on derivatives, and heard a report on cybersecurity.

Regarding the derivatives proposal, the agency said it is intended to modernize the current rule and make it more “principles-based.” “This proposal retains key safety and soundness components, while providing more flexibility for federal credit unions to manage their interest rate risk (IRR) through the use of Derivatives,” the agency said in proposing the rule.

Further, NCUA said, 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’ Ito asserted that state credit union derivative authority “properly rests” with state supervisors, and that they have the experience to apply that power. “State credit union regulators have extensive experience with derivatives and interest rate swaps both in state-chartered credit unions and community banks,” Ito said. “The state system looks forward to assisting NCUA in raising awareness of derivative oversight in the broader credit union system by bringing state regulator credit union experience and lessons to the learning table.”

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.”

Meanwhile, during the discussion on cybersecurity (which featured a staff presentation outlining risks related to the coronavirus crisis), NCUA Board Chairman Rodney Hood was joined by Board Members J. Mark McWatters and Todd Harper in voicing support for third-party vendor examination authority for the agency. Unlike federal banking regulators, NCUA lacks direct statutory exam authority over those vendors.

NASCUS has supported the agency obtaining examination authority 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.

The association has also supported efforts to strengthen state regulatory examination and supervision of third parties providing services to state chartered institutions.

LINKS:
NCUA Proposed Rule, Part 703, Derivatives

Board Briefing, Cybersecurity Considerations for Boards of Directors During COVID-19.

A final rule on corporate credit unions that is generally aimed at clarifying a number of provisions in NCUA’s rules was approved unanimously by the agency’s board Thursday.

In other action, the board issued a proposal on credit union investments in derivatives, and heard a staff report on cybersecurity issues (see following item). A proposed request for information (RFI) on supervisory guidance review and improvements in communications was removed from the board’s agenda; Chairman Rodney Hood announced the board members agreed to remove the proposal.

The final corporate rule, NCUA said, addresses five key areas in the existing rules. The new regulation:

permits a corporate credit union to make a minimal investment in a credit union service organization (CUSO) without the service organization being subjected to heightened agency oversight;
expands the categories of senior staff positions at member credit unions eligible to serve on a corporate credit union’s board;
removes the “experience and independence” requirement for a corporate CU’s enterprise risk management (ERM) expert;
clarifies the definition of a collateralized debt obligation;
simplifies the requirement for net interest income modeling.

The final rule incorporates most of the recommendations that the state system, through NASCUS’ comment letter, offered to the agency. “Broadening eligibility of natural person credit union senior staff to serve as board members should expand access to highly relevant expertise,” NASCUS President and CEO Lucy Ito said, underscoring the association’s support for the provision, and the fact that six of 11 corporate credit unions are state-chartered. “And, enabling corporate CUs to make minimal investments in a CUSO without triggering a ‘corporate CUSO’ classification should enable the credit union system to stay abreast of broader fintech developments,” she said.

NASCUS’ recommendation not to include a provision from the proposal is also reflected in the final rule. That is: removing approved corporate activities from the agency’s website and, instead, incorporating the activities into the regulation as an appendix. NASCUS advised the agency that the administrative process of making that change would add delay and hamper the ability of corporate credit unions to obtain timely determinations of proposed new activities. NCUA, in its final rule, noted that no commenters supported the change – and thus decided to drop it.

The final rule also makes some changes with regard to proposed subordinated debt offerings by credit unions. NCUA had proposed including a definition of the debt instrument (a method for bolstering capital positions for some credit unions) in the corporate rule, as a way of setting the stage for a subsequent final rule on subordinated debt instruments offered by credit unions. (A proposal was issued in January on subordinated debt; the comment period ended in July.) The corporate rule had also proposed requiring corporate credit unions to deduct from their tier 1 capital any subordinated debt instruments they purchased from credit unions, to protect the capital position of the corporates.

However, NCUA decided to remove both of those provisions from the final rule, noting that both sections would be addressed in a final rule on subordinated debt. The agency added that it does not envision any changes to the proposed definition.

NASCUS’ Ito said the state system looks forward to discussion with the agency about corporate CU participation in subordinated debt as the agency moves toward a final rule on the subject.

Also during the Thursday meeting, NASCUS’ comment letter on the proposed corporate rule earned a shout-out from Board Member Todd Harper, who noted the state system’s support for allowing minimal investment by corporates in CUSOs.

LINK:
NCUA Final Rule, Part 704, Corporate Credit Unions

NCUA has issued “interim guidance” for credit unions interested in serving the legalized hemp industry. The guidance will be updated as needed as necessary regulations are issued by the United States Department of Agriculture (USDA) and others regarding the growth, processing, manufacture, and retail sale of hemp. The change in federal law results from the 2018 Farm Bill removing hemp from Schedule I of the Controlled Substances Act (signed into law on December 20, 2018).

NASCUS Legislative & Regulatory affairs staff summarized the alert and it can be found here.