(Jan. 21, 2022) Under the last portion of the letter, on the agency’s exam program – and particularly on “recording of official meetings” – the letter holds a footnote stating that the guidance provided in the letter on recordings of exit meetings with examiners only applies to NCUA examiners.
“State examiners will follow guidance provided by the state supervisory authority,” the footnote reads. “Generally, the NCUA will defer to the state supervisory authority for state-chartered credit union meetings.”
During a virtual appearance this week at the Volunteer Leadership Institute (VLI) conference in Waimea, Hawaii, NASCUS President and CEO Brian Knight suggested that NCUA’s disclaimer about deference to state authority on federally insured, state chartered credit union (FISCU) exams should have been more prominent than a footnote so as to avoid potential confusion.
“We have 45 states and many of the states don’t think (recording) is going to be beneficial,” Knight told the group, according to reporting by CUToday.info. Referring to state regulators, Knight added “they do think it creates a chilling effect. They either do not allow it or discourage it intensely.”
Knight made his remarks to the conference during a session with NCUA Board Member Rodney Hood, which was moderated by HI Credit Union President and CEO Dennis Tanimoto. Knight participated in the session via the Internet from NASCUS headquarters in Arlington, Va. The conference is sponsored by the consulting firm Rochdale Paragon.
In other comments, Knight told the group:
- State regulators have great familiarity with some of the most sophisticated financial services transactions, products and services being offered, given the other institutions their agencies may supervise (including industrial savings and loans, banks, money transmitters and other entities). He said that expertise flows out of the state system and benefits the entire credit union system.
- Issues to watch for the state system in the coming year, Knight indicated, include third-party vendor due diligence and management, and BSA/AML issues.
- The state system’s service and performance during the coronavirus pandemic is worth of praise, and that the partnership between state and federal regulators has been “fantastic.”
(Jan. 21, 2022) Credit risk management, cybersecurity and payment systems are the three top supervisory priorities for NCUA, the agency said this week.
Additionally, the agency indicated it will also be taking a closer look at overdraft programs at credit unions, with an eye to perhaps further action in 2023.
Overall, NCUA said in its letter to credit unions (22-CU-02), it will continue to conduct examination and supervision activities primarily offsite, given the uncertainty associated with the coronavirus crisis.
“Working with our public health consultant, the agency continues to closely monitor the COVID-19 pandemic trends and will resume onsite examination and supervision work when safe to do so,” the letter stated.
On its apparent top priority of credit risk management, the agency said its examiners would continue to review management and mitigation efforts at credit unions. “For all lending programs, credit unions’ risk management practices should be commensurate with the level of complexity and nature of their lending activities,” the agency letter states. “Credit unions must maintain safe-and-sound lending practices and comply with consumer financial protection laws, including disclosures and regulatory reporting requirements.”
Examiners will focus on adjustments credit unions made to lending programs to address borrowers facing financial hardship, the letter states. Examiners will also emphasize reviewing policies that address the use of loan workout strategies, risk-management practices, and “new strategies implemented to provide funds to borrowers under distress, including programs authorized under the CARES Act and extended in the Consolidated Appropriations Act, 2021,” the letter states. Examiners will evaluate credit unions’ controls, reporting, and tracking of these programs, in particular, NCUA wrote.
“NCUA examiners will not criticize a credit union’s efforts to provide prudent relief for borrowers when such efforts are conducted in a reasonable manner with proper controls and management oversight,” the letter stated.
On cybersecurity, the agency said it is developing updated information security examination procedures tailored to institutions of varying size and complexity. The procedures will be piloted and finalized this year, NCUA said. “Cybersecurity risks remain a significant threat to the financial system,” the letter stated. “Ransomware, third-party/supply chain risks, and business email compromises, in particular, continue to be of concern.”
The agency asserted that payment systems are growing in complexity and risk for credit unions and consumers, pledging increased focus in the area. “Today’s environment of easy and fast electronic processing of transactions relies on technology, the applications and their controls, and the underlying security of the platforms facilitating the transactions,” NCUA wrote. “The changes in payment systems increase the risk of fraud, illicit use, and breaches of data security.”
Key points of the other priorities include:
- Overdraft programs (consumer financial protection): Examiners will request information about a credit union’s policies and procedures governing its overdraft programs and the monitoring tools and audit of its overdraft programs, as well as the communications it provides to consumers about such programs. “We anticipate using this documentation for a fuller review of credit unions’ overdraft programs in 2023,” NCUA wrote.
- Loan-loss reserving: The agency reminded that credit unions subject to generally accepted accounting principles (GAAP) are required to implement the current expected credit losses (CECL) accounting methodology by the start of next year. (Credit unions under $10 million are not required to follow GAAP.) All federal credit unions, the agency noted, will be required to have a reasonable reserve methodology, provided the methodology adequately covers known and probable loan losses. Federally insured, state-chartered credit unions (FISCUs) should refer to state law on GAAP accounting requirements and CECL standard applicability, the agency wrote.
- Loan participations: Examiners will verify that credit unions have evaluated the risk in the loan participation transactions and how that risk fits within the tolerance levels established by the credit union’s board. At a transactional level, NCUA said, each loan participation must have separate and distinct records for individual payments, including principal, interest, fees, escrows, and other information relating to individual loans.
- LIBOR transition: Examiners will focus on credit unions with significant LIBOR exposure or inadequate fallback language.
LINK:
NCUA Letter to Credit Unions 22-CU-02: NCUA’s 2022 Supervisory Priorities
(Jan. 14, 2022) Changes in risk-based capital requirements for federally insured credit unions have triggered changes in call reports, effective for the first quarter of 2022, NCUA said this week.
In a release, the agency said it is revising its call report (Form 5300) starting with the March 2022 reporting cycle. The changes were spurred by the adoption last month of the new Complex Credit Union Leverage Ratio (CCULR) rule, which took effect Jan. 1.
The agency said the revised call report is part of its 2016 “Call Report Modernization Initiative,” which it added “examined how changes to the agency’s data collection practices could enhance the value of the data NCUA collects from credit unions for offsite monitoring and pre-examination planning as well as reduce the reporting burden for credit unions where appropriate.”
The CCULR is aimed at creating a framework which allows “complex” credit unions (those with more than $500 million in assets) opting in to maintain the CCULR instead of risk-based capital (which also took effect Jan. 1). Under CCULR, a complex credit union may qualify to opt in to the CCULR framework if it has a minimum net worth ratio of 9%. The minimum requirement for a classification of “well capitalized” under the CCULR framework – modeled on federal banking agencies’ community bank leverage ratio (CBLR) – is higher than the 7% minimum ratio required under prompt corrective action (PCA) but lower than the 10% required under risk-based capital.
The CCULR final rule also amends provisions of the 2015 risk-based capital final rule. NCUA has noted that, based on June 30, 2021, call report data, about 70% of complex credit unions (down from 90% pre-pandemic) qualify to use the CCULR framework and would be well capitalized under a 9% calibration.
LINK:
(Jan. 14, 2022) More than two more weeks – to Jan. 31 – have been added for federally insured credit unions (FICUs) to complete and submit the voluntary Credit Union Diversity Self-Assessment by NCUA, the agency said this week. It also issued a “letter to credit unions” Thursday calling attention to the extension.
NCUA said it had extended the deadline for FICUs to complete and submit the assessments from Jan. 15 to month’s end. The agency gave no reason for the extension, other than to give FICUs “more time.”
According to NCUA, the assessment is a tool designed to help credit unions evaluate and advance their diversity policies and practices. The agency said credit unions can voluntarily use the online tool to create a baseline for action, such as making the commitment to develop new products and services aimed at addressing the needs of communities of color, increasing investment in underserved areas, or improving community marketing and outreach.
“The voluntary self-assessment is not part of the examination process,” the agency’s letter states. “Completing an assessment will not impact your CAMELS rating. There are many benefits in confidentially sharing your diversity, equity, and inclusion journey with the NCUA, but it will not be used in the supervisory process.”
LINK:
(Jan. 7, 2022) The nomination of Todd M. Harper to be reappointed chairman of the NCUA Board, for a six-year term to run through April 2027, was resubmitted by the White House to the Senate this week – even though Harper in September testified in a confirmation hearing before the Banking Committee.
The resubmission of Harper’s nomination was one of three for federal financial regulators made by the White House this week (and more than 100 submitted overall). The other two were for Federal Reserve Board Chair Jerome H. (“Jay”) Powell and Board Member Lael Brainard. The White House had originally submitted those nominations Dec. 13. Powell has been nominated to be reappointed chair of the board (for a four-year term ending in 2026; Brainard has been nominated to be vice chair of the board, also for term ending in 2026.
The reasons for the resubmittals is largely procedural. Jan. 3 marked the beginning of the second session of the current Congress. Under Senate rules, nominations not confirmed by the end of a legislative session must be returned to the White House and resubmitted. New confirmation hearings for those already conducted (such as Harper’s) are unlikely.
Meanwhile, confirmation hearings for Powell and Brainard for their leadership posts on the Fed Board were announced this week by the Senate Banking Committee. Powell’s hearing will be Tuesday (Jan. 11) and Brainard’s Thursday (Jan. 13).
LINK:
Nominations Sent to the Senate
(Jan. 7, 2022) NCUA closed out 2021 by liquidating a credit union, and started 2022 by merging a struggling California credit union with another in the Golden State.
Early this week, the agency announced that Pomona Postal Federal Credit Union (of Pomona), with assets of $4.08 million and 717 members, merged into the Credit Union of Southern California, Anaheim, as of Jan. 1. CU of Southern California had $2.2 billion in assets, and just under 130,000 members, as of the end of the third quarter, according to NCUA call report data.
Pomona Postal FCU was officially conserved by NCUA on Nov. 5. According to the agency, it worked to “address issues affecting the credit union’s safety and soundness,” but determined ultimately that merging Pomona Postal into the larger credit union “was in the best interests of its members.”
Last week, the agency announced it had liquidated Portsmouth Schools Federal Credit Union in Portsmouth, Va. The $2.2 million credit union, with 870 members, was chartered 80 years ago to serve teachers, employees, students, and family members of various schools within the Portsmouth, Va., public school system, NCUA noted. The agency gave no reason for the credit union’s liquidation. It was at least the fourth credit union to be shuttered by the agency in 2021.
Portsmouth’s assets, member shares and loans were assumed by BayPort Credit Union (which is apparently chartered as Newport News Shipbuilding Employees Credit Union, but operating under the BayPort name) of Newport News, Va. BayPort, NCUA said, had $2.2 billion in assets, and about 147,000 members, at the end of the third quarter.
LINKS:
Pomona Postal Federal Credit Union Merges into Credit Union of Southern California
(Jan. 7, 2022) A regulatory alert calling attention to threshold and fee adjustments – which are increasing for the new year — under truth in lending, consumer leasing and fair credit reporting regulations by the CFPB was distributed last week by NCUA.
The alert, sent to all federally insured credit unions, notes that last month the bureau issued final annual adjustments for the exemption thresholds outlined under the Truth in Lending Act (TILA or Regulation Z) and the Consumer Leasing Act (CLA or Regulation M). The alert also points out that CFPB issued an annual adjustment to the maximum amount credit bureaus may charge consumers for making a file disclosure to a consumer under the Fair Credit Reporting Act (FCRA or Regulation V).
More specifically:
- The Reg Z threshold (for appraisals for higher-priced mortgage loan exemptions) will increase to $28,500 from $27,200.
- The Reg M threshold (for consumer credit and consumer lease exemptions) will increase to $61,000 from $58,300.
- The Reg V ceiling (for credit bureau consumer report fees) will increase to $13.50 from $13.
The Reg Z and Reg M threshold changes are based on the annual increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) in effect as of June 1, 2021. The Reg V ceiling is based on the CPI for all urban consumers.
LINK:
(Dec. 23, 2021) Pandemic-related regulatory relief under rules on loan participations, eligible obligations, and occupancy requirements for certain properties has been extended to year-end 2022, under a temporary final rule given the green light in a unanimous notation vote by the NCUA Board this week.
The agency said the relief measures, originally approved in April 2020, are aimed at helping federally insured credit unions (FICUs) remain operational and able to address economic conditions caused by the COVID-19 pandemic.
This action continues, temporarily:
- the increase in the maximum aggregate amount of loan participations that a FICU may purchase from a single originating lender to the greater of $5 million or 200% of the FICU’s net worth;
- the suspension of limitations on the eligible obligations that a federal credit union (FCU) may purchase and hold; and
- the tolling of the required timeframes for the occupancy or disposition of properties not being used for FCU business or that have been abandoned (given the physical distancing practices necessitated by COVID–19).
The temporary revisions were originally set to expire last year-end, but Dec. 31, 2020, extended through this year. “Due to the continued impact of COVID-19, the Board has decided it is necessary to further extend the effective period of these temporary modifications until Dec. 31, 2022,” the agency stated in its notice for the Federal Register, which was set to publish Wednesday.
The provisions of this rulemaking generally take effect upon publication.
LINK:
NCUA Board Approves COVID-19 Regulatory Relief Extension
(Dec. 23, 2021) When credit unions open their doors for business on Jan. 3, a revised regulatory landscape will stretch before them with three regulatory changes that took effect Jan. 1: a new “risk-based capital” (RBC) rule, a new “complex credit union leverage ratio” (CCULR), and a new reference rate to replace the then-defunct London Interbank Offered Rate (LIBOR).
The RBC rule was approved by NCUA more than six years ago (and amended more than three years ago). Its aim was to require credit unions taking certain risks to hold capital commensurate with those risks. It restructured the agency’s existing “prompt correction action” (PCA) rules, including by adding a risk-based capital ratio (rather than a risk-based net worth ratio) for federally insured credit unions.
The effective date of the rule was delayed repeatedly by NCUA, as the agency considered (and later made) changes to the asset size for defining a “complex” credit union, which is affected by the RBC rule, and restructured the rule in consideration of recent events.
The agency first issued its risk-based capital proposal for “complex” credit unions – then defined as those with more than $100 million in assets – in 2014, with implementation slated 18 months after the rule would have been finalized. A revised proposed rule was issued in 2015 and finalized that October with an effective date of Jan. 1, 2019. That final rule replaced the risk-based net worth ratio contained in the 2015 rule with a new risk-based capital ratio for federally insured credit unions, which the NCUA called comparable to the regulatory risk-based capital measures used by the federal banking agencies: the Federal Deposit Insurance Corp. (FDIC), Federal Reserve, and Office of the Comptroller of Currency (OCC).
However, in 2018 the NCUA Board revised its definition of “complex” credit unions to include only those credit unions with more than $500 million in assets and delayed the rule’s implementation again, to Jan. 1, 2020. A year later (in 2019) the agency pushed the rule’s implementation date to Jan. 1, 2022. The delay was necessary, the agency said, to review potential changes to credit union capital such as subordinated debt authority; capital requirements for asset securitization; and an option like the community bank leverage ratio (CBLR) that had since been adopted for banks by federal banking agencies.
The board, in fact, addressed all those issues – including, just last week, finalizing the CCULR which it described as an “off-ramp” for eligible complex credit unions from the RBC rule. The rule also took effect Jan. 1; it was approved just last week.
That final rule creates a framework that allows “complex” credit unions opting in to maintain the CCULR instead of risk-based capital. Under CCULR, a complex credit union – one having more than $500 million in assets – may qualify to opt in to the CCULR framework if it has a minimum net worth ratio of 9%. this minimum requirement for a classification of “well capitalized” under the CCULR framework – modeled on federal banking agencies’ community bank leverage ratio (CBLR) – is higher than the 7% minimum ratio required under prompt corrective action (PCA) but lower than the 10% required under risk-based capital. The CCULR final rule also amends provisions of the 2015 risk-based capital final rule. The agency notes that based on June 30, 2021, call report data, about 70% of complex credit unions (down from 90% pre-pandemic) qualify to use the CCULR framework and would be well capitalized under a 9% calibration.
(Also taking effect Jan. 1: changes to NCUA’s rule on subordinated debt, aimed at easing low-income credit unions’ participation in Treasury’s Emergency Capital Investment Program (ECIP), which was created to help communities hard hit economically by the COVID-19 pandemic. The revisions amend the definition of “grandfathered secondary capital” to include any secondary capital issued to the U.S. government or one of its subdivisions under a secondary capital application approved before Jan. 1, 2022, regardless of the date issued. The final rule also extends the expiration of regulatory capital treatment for such secondary capital issuances to the later of 20 years from the date of issuance or Jan. 1, 2042. According to the NCUA, Treasury on Dec. 14 said 85 credit unions will receive about $2 billion in funding that can be used as secondary capital.)
Finally, also effective Jan. 1: LIBOR can no longer be used as a reference rate for a wide variety of financial instruments: from derivative contracts to consumer loans written after Jan. 1 (existing contracts may use LIBOR until June 30. 2023, when LIBOR will be completely phased out). Financial institutions and others will have to use an alternative, which (for derivatives and many other financial contracts) is the Federal Reserve-developed Secured Overnight Financing Rate (SOFR), a broad Treasuries repurchase financing rate.
NCUA has not told credit unions they must use SOFR for their consumer, student, commercial, real estate or other loans with potential LIBOR exposure. Instead, the agency has left that up to each institution to determine for itself (as long as the credit union determines the rate is appropriate for its risk management and member needs).
The agency has also advised that all LIBOR-based contracts that mature after Dec. 31 (one-week and two-month) and June 30, 2023 (one-, three-, six- and twelve-month) should include contractual language that provides for use of a robust fallback rate.
(Dec. 17, 2021) NASCUS’ Ito acknowledged the agency’s efforts. “We commend the board for its thoughtful and unprecedented consideration of stakeholder feedback in finalizing the agency’s 2022 budget. On behalf of state credit union regulators and credit unions, NASCUS appreciates the downward adjustment of the 2022 proposed overhead transfer rate from 63.4% to 62.7%,” she said.
However, she asserted that the state system remains concerned about the underlying structural issues that dictate the calculation of the OTR and the federal credit union operating fee (see item below).
Finally, Ito said the state system also values the NCUA Board and staff commitment to providing more detailed explanations of new staff positions as well as clarifications in the budget justification related to state examiner equipment expenses and the payment of supervisory fees by state credit unions to their respective state regulators. “NASCUS and the state system look forward to continued open dialogue with our NCUA partners on how, together, we can assure both the safety and soundness of credit unions and the ongoing vitality of the dual charter credit union framework,” she said.
(Dec. 17, 2021) Self-testing of credit unions’ cybersecurity preparedness through an application released in October costs nothing and can be downloaded via NCUA’s website, the agency said in a letter this week to federally insured credit unions.
The Automated Cybersecurity Evaluation Toolbox (ACET) was created to help credit unions conduct a maturity assessment that aligns with the Federal Financial Information Council’s (FFIEC) Cybersecurity Assessment Tool, NCUA said in letter 21-CU-15, signed by agency board Chairman Todd Harper. It said the toolbox can be used by institutions of all sizes and complexity to determine and measure their information and cybersecurity preparedness against several industry standards and best practices.
The agency said the assessment incorporates cybersecurity standards and practices established for financial institutions: It includes practices found in the FFIEC IT Examination Handbooks, regulatory guidance, and leading industry standards like the National Institute of Standards and Technology (NIST) Cybersecurity Framework.
“While we highly encourage the use and implementation of the maturity assessment for a credit union to determine its information and cybersecurity preparedness level, it is only a self-assessment,” according to the letter. “Credit unions are not required to use the Toolbox or complete the maturity assessment. However, it can provide insight into additional steps a credit union may consider taking to strengthen its overall security posture.”
LINK:
(Dec. 17, 2021) A final regulation tweaking the agency’s subordinated debt rule by amending the definition of “Grandfathered Secondary Capital” to include any secondary capital issued to U.S. government or one of its subdivisions under an application approved before January 1, 2022, irrespective of the date of issuance, was also approved by the board.
NCUA said the change will benefit eligible low-income credit unions that are either participating in the Treasury Department’s “Emergency Capital Investment Program” (ECIP) or other programs administered by the federal government that can be used to fund secondary capital, “if they do not receive the funds for such programs by Dec. 31.”
The final rule also provides that the expiration of regulatory capital treatment for these issuances is the later of 20 years from the date of issuance or Jan. 1, 2042.
NASCUS, in its comment letter on the proposal (submitted in October) recommended that “a basic sunset provision could provide compatibility between the Subordinated Debt rule and the rules of qualifying government funding program.”
LINK: