(Dec. 17, 2021) NCUA’s fall rule agenda was published late last week, along with other agencies (see item on CFPB), with 21 projects listed, 14 of them in “final rule stage.”
Among the key items of both proposed and final rules:
- A proposed rule on compensation in connection with loans to members and lines of credit to members, following up on a request for comment issued in 2019. The agency expects action this spring.
- A notice of proposed rulemaking by this summer on decentralized finance and cryptocurrencies as they relate to the credit union industry, following up on a request for information (RFI) issued in July.
- A final rule on “combination transactions” (also known as credit union purchases of banks), perhaps as early as February, to “establish requirements related to transactions where a federally insured credit union (FICU) proposes to assume liabilities from an institution other than a credit union.” The agency issued a proposal early this year.
- Another final rule to amend the agency’s procedures on “suspicious activity reports” (SARs) to allow the agency to issue exemptions from those requirements to provide relief to federally insured credit unions (FICUs) that develop innovative solutions to meet the requirements of the Bank Secrecy Act (BSA). The final follows a proposal issued in January.
LINK:
NCUA Fall ’21 rulemaking agenda
(Dec. 17, 2021) Finally, the board also approved a change to its investment regulation to allow FCUs to purchase mortgage servicing rights (MSRs) from other federally insured credit unions (FICUs, including states), under certain conditions.
Under the final rule, FCUs with a CAMEL or CAMELS composite rating of 1 or 2, including a “management” component rating of 1 or 2, may purchase the mortgage servicing rights of loans from FICUs, provided that: 1) the underlying mortgage loans of the assets are loans the FCU is otherwise empowered to grant; 2) the purchase will be made in accordance with the FCU’s written policies that address the risk of these investments and servicing practices; and 3) the FCU’s board of directors or investment committee approves the purchase in advance.
NCUA cited comments submitted during the comment period that “strongly recommended” NCUA work with state regulators to address supervisory concerns regarding mortgage servicing rights in a manner that “does less harm to the dual chartering system, more effectively mitigates material risk, and improves oversight while not unnecessarily burdening credit unions.”
In the commentary of its final rule, NCUA noted that the final rule only applies to FCUs by removing its previous prohibition against purchases of MSRs. “It is not apparent to the Board that state laws applicable to FISCUs widely provide for similar investment authority, although most state regulators can grant parity for state-chartered credit unions so those institutions may engage in the same activities authorized for FCUs,” NCUA wrote. “Further, to the extent that FISCUs engage in the purchase of MSAs from other parties, the conditions on these assets under the RBC requirements in part 702 apply to all complex federally insured credit unions.”
The agency vowed to monitor such activity in state-charted, federally insured CUs and “will consider whether to extend § 703.14(l) to FISCUs under part 741, subpart B, if necessary.” The agency also noted its commitment to “continued communications with state regulators to address supervisory concerns, including those related to MSAs.”
LINK:
Final Rule, Part 703, Mortgage Servicing Assets
(Dec. 17, 2021) Kelly Lay is the new top examination executive for NCUA, the agency said this week replacing the retiring top staffer at the start of the year.
The agency said Lay, who replaces Myra Toeppe as NCUA Office of Examination & Insurance director, is a 25-year veteran of the agency. She has served as an examiner, supervision analyst, director of supervision and insurance in regional offices, and was associate director of programs for the agency’s region II. She takes over as office director on Jan. 1.
The agency said she was “also instrumental in guiding the development of the NCUA’s new examination system, the Modern Examination & Risk Identification Tool” (MERIT). She holds a BS (finance) from Illinois State University, and earned a certified public accountant (CPA) certification in Illinois in 2002.
Toeppe is retiring after more than 10 years at the agency and 34 years of public service, including at other federal financial institution regulators.
The examination and insurance office for the agency oversees exams and supervision of federally insured credit unions, as well as managing risk for the National Credit Union Share Insurance Fund (NCUSIF), which insures credit union members’ savings.
LINK:
Kelly Lay Named Director of the Office of Examination and Insurance
(Dec. 17, 2021) A final rule adopting an “off ramp” from risk-based capital (RBC) requirements for complex credit unions will take effect Jan. 1 after unanimous action by the NCUA Board Thursday.
The regulations include several changes from the proposal issued in July: It adopts a 9% complex credit union leverage ratio (CCULR), permanently grandfathering excluded supervisory goodwill from the deduction in the risk-based capital numerator, and excluding grandfathered supervisory goodwill from the goodwill qualifying criteria for the CCULR framework.
It applies to federally insured, natural-person credit unions classified as “complex” (those with total assets greater than $500 million).
Designed to provide a simplified measure of capital adequacy (like that provided by federal banking regulators under the community bank leverage ratio, CBLR), qualifying credit unions that maintain the 9% minimum net worth ratio (and meet other qualifying criteria) are allowed to “opt into” the CCULR framework. Once it does that, NCUA said, an eligible credit union need not calculate a risk-based capital ratio under the NCUA Board’s risk-based capital final rule.
Further, a qualifying complex credit union that opts into the CCULR framework and maintains the minimum net worth ratio is considered well capitalized, NCUA said.
The CCULR surfaced in July with a proposal to make a simplified measure of capital adequacy available to federally insured credit unions defined as “complex” – meaning those with more than $500 million in assets. It was inspired by the bank CBLR that went into effect in January 2020 for banks under the 2018 financial regulatory relief law. That rule allows banks to hold a certain, uniform level of capital (now at 9% of assets) as long as they meet certain conditions, including in lending and investments.
The 9% requirement is repeated in the new NCUA rule; a provision included in the proposal that the rate would rise gradually to 10% by Jan. 1, 2024 was dropped from the final rule.
In its October comment letter, NASCUS wrote that the state system supports the CCULR, as well as a quick implementation of a final regulation. However, the state system suggested that: subordinated debt should be permitted in calculating net worth for CCULR thresholds; complex credit unions of all sizes can appropriately manage the optionality of both entering and exiting the CCULR; and changes are needed to the current (and proposed) risk-based capital (RBC) and subordinated debt rules in order to avoid a “chilling effect” on the low-income credit union (LICU) secondary capital system.
NCUA took a pass on including subordinated debt in calculating net worth for CCULR thresholds. The agency argued that subordinated debt can be an expensive form of capital, both in the terms of the cost of issuing it and in terms of necessary rate of return to investors. Also, the agency said, the capital form it may not be readily available during times of stress.
It also declined to make any additional changes, for now, to the existing sub debt and RBC rules. “The Board will separately monitor implementation of the subordinated rule and consider any appropriate changes in the future, the agency wrote. The final rule also made no changes to the opt-in procedures.
LINKS:
Final Rule, Parts 702 and 703, Complex Credit Union Leverage Ratio
(Dec. 17, 2021) Meanwhile, the board also approved a $320.1 million operating budget that was $6 million less than that proposed. To reach that lower level, the agency also cut 46 full-time equivalent (FTE) positions that were proposed last month. For next year, the agency will carry 1,196 FTEs.
However: the board also decided to reduce the amount that federal credit unions (FCUs) pay to fund the remainder of the NCUA operating budget (the OTR will fund 62.7% of the agency operations, the FCU operating fee 37.3%). The agency is doing that by crediting to FCUs $15 million from “accumulated cash in excess of funding needs.” As a result, on average, in 2022 FCUs will pay approximately 24% less than they paid NCUA in 2021.
The agency said there the $15 million credit (from the agency’s operating fund), represents past-year, unspent operating fee cash collections “the NCUA does not currently require.” “It is important to note that the OTR is billed throughout the year for actual expenses, so there are not excess funds collected that can be ‘returned’ at the end of each year,” NCUA explained. However, as NASCUS has previously argued, a problem with the OTR and budgeting process is that, once the OTR is set, there is no reconciliation to affirm or correct the workload analysis assumptions that drive the OTR calculation, itself.
As another point in explaining the credit for the operating fee, the agency also said that, based on call report data through Sept. 30, average asset growth is calculated at 16.3%, an increase of approximately 200 basis points from the 14.3% projected asset growth included in the draft budget.
The decrease in the operating fee is 23.7% compared to 2021, NCUA said, adding that it is also “a 1,250 basis point reduction from the estimate provided in the staff (budget) draft.”
(Dec. 17, 2021) An increased overhead transfer rate (OTR) for 2022, a final operating budget of $320 million for next year, and three final rules – on the complex credit union leverage ratio (CCULR), subordinated debt and mortgage servicing assets — were all approved by the NCUA Board at a busy meeting this week.
All actions by the board (including new rules, see items) were approved unanimously.
In a U-turn, the board voted to reduce the staff-proposed OTR, but it is still higher than the last two years.
The board gave the nod to a 62.7% OTR to partially fund its 2022 budget of $320.1 million. The board’s action on the OTR, which represents the rate at which funds are transferred from the National Credit Union Share Insurance Fund (NCUSIF) to pay for “insurance related” expenses of the agency, is the third straight year that the rate has been raised (at 40 basis points higher than 2021, and 140 bp higher than 2020).
Although the OTR is higher again for 2022, the figure the board ultimately approved was lower than that proposed last month when the budget was unveiled. Originally, the agency recommended a 63.4% rate.
As recently as last week, during the agency’s briefing and public comment on its 2022 budget, NASCUS asserted that every dollar that is transferred from the insurance fund to fund NCUA expenses is one dollar not available to cover losses in the system, and subsequently a dollar that may need to be replenished in the NCUSIF by the charging of a premium.
NASCUS also urged the agency to do a more complete job in explaining how and why the OTR changes from year to year. “Credit unions should also be interested in what additional costs NCUA is now covering with NCUSIF dollars,” NASCUS President and CEO Lucy Ito said in prepared comments for last week’s briefing. In that regard, she was repeating the view of the state system that the agency needs to do better in communicating what goes into the OTR.
In response, NCUA indicated it is listening. “The NCUA will also look to provide better explanation for the drivers behind the year-over-year OTR changes in budget documents going forward, rather than just reporting on the level of the change,” agency staff said in background materials submitted for this week’s board meeting.
LINK:
NCUA’s 2022-2023 Budget: Board Action memorandum
(Dec. 17, 2021) To clarify existing authority about federally insured credit unions (FICUs) establishing relationships with third-party providers of digital asset services to their members, NCUA issued a letter to credit unions Thursday.
The agency, in letter to credit unions (LTCU) 21-CU-16 said the relationships are allowed under current regulation “provided certain conditions are met.”
“This includes third-party provided services to allow FICU members to buy, sell, and hold uninsured digital assets with the third-party provider outside of the FICU,” NCUA wrote. “Digital assets are one of many terms used to describe distributed ledger technology (DLT) based tokens.”
The agency said its role as an insurer does not prohibit FICUs from establishing the relationships. “The authority for federal credit unions (FCUs) to establish these relationships is described in section II of this letter,” the agency wrote.
“The authority for federally insured, state-chartered credit unions (FISCUs) to establish these relationships will depend upon the laws and regulations of their states,” it added.
LINK:
Relationships with Third Parties that Provide Services Related to Digital Assets
(Dec. 3, 2021) A regulatory alert on Truth in Lending (Regulation Z) annual threshold adjustments for various loans – which take effect Jan. 1 — was issued this week by NCUA, following up on action taken by the CFPB earlier this fall.
The NCUA alert (RA-21-10) notes that the adjustments for credit cards, closed-end home equity loans and qualified mortgages (QMs) are based on the annual percentage change reflected in the Consumer Price Index (CPI) as of June 1, 2021. CFPB is required to calculate the dollar amounts for several provisions in Reg Z each year.
In late October, the bureau increased many, but not all, of the threshold dollar amounts for the loans covered under Reg Z. No change in the $1 threshold triggering minimum interest charge disclosure requirements on open-end consumer credit plans was made, for example.
For open-end credit plans under the CARD Act, there were increases to $30 in the adjusted dollar amount for safe harbor for a first violation penalty fee and to $41 in the threshold for a subsequent violation penalty fee. For HOEPA loans, the adjusted total loan amount threshold for high-cost mortgages in 2022 will be $22,969, the agency said; the adjusted points-and-fees dollar trigger will be $1,148.
For QMs, the changes are a bit more complicated, with various thresholds for the spread between the annual percentage rate (APR) and the average prime offer rate (APOR) in 2022. The changes are detailed in the alert.
LINK:
(Dec. 3, 2021) Congress should make permanent temporary enhancements to the fund that backs up credit union liquidity, which were made in response to the coronavirus crisis, the three members of the NCUA Board wrote this week.
However, if the changes cannot be made permanent, the board members allowed, Congress should consider at least a one-year extension.
The joint letter to Congress, signed by all three members of the NCUA Board, asked that the enhancements to the agency’s Central Liquidity Fund (CLF) be made permanent. The temporary changes were made via the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of 2020.
Although those changes have been extended once already – in the Consolidated Appropriations Act of 2021 (which became effective in December 2020) – the changes are scheduled to expire on Dec. 31, according to the NCUA Board members’ letter. The letter indicated that by not making the changes permanent, thousands of credit unions could lose access to the liquidity facility. (The CLF, owned by credit unions and managed by NCUA, is a back-up source of liquidity for credit unions, like the way the Federal Reserve’s discount window provides access to loans for eligible banks and other financial institutions.)
As of October 2021, 4,107 credit unions or 82% of all federally insured credit unions have access to the CLF, up from 283 as of April 2020, the letter states. “The growth in the number of CLF members is a testament to our nation’s credit unions coming together in a time of crisis to strengthen the national system of cooperative credit.”
LINK:
NCUA Board Calls on Congress to Make CLF Enhancements Permanent
(Nov. 24, 2021) The state system is seeking to provide its views of the proposed NCUA 2022 budget at the agency’s public briefing in two weeks, particularly the proposed increased in the overhead transfer rate (OTR) – for the third straight year — in the spending plan.
If approved, NASCUS President and CEO Lucy Ito will provide the state system’s perspective at the briefing, scheduled for Dec. 8 at 2 p.m. (and to be live-streamed via the Internet).
The overhead transfer rate (OTR) provides a portion of the funding for NCUA’s “operating budget” of $326 million (which makes up 94.4% of the overall agency budget). For 2022, the OTR will be set at 63.4%, according to the budget papers posted by NCUA. The transfer means that nearly two-thirds of the 2022 operating budget ($206.7 million) will be paid out of the share insurance fund. The remainder of the operating budget comes from “operating fees” paid by federal credit unions.
The OTR represents money that is transferred from NCUSIF to the operating budget of the agency to cover “insurance-related” expenses of the agency. The remainder of the operating budget is covered by the operating fee paid by federal credit unions.
NASCUS President and CEO Lucy Ito pointed out that the proposed 2022 OTR will be the third straight year that an increased transfer rate has been proposed by the agency (at 61.3% in 2020, 62.3% in 2021, and the proposed 63.4% for 2022). She also noted that the number of federally insured, state-chartered credit unions has been declining. At year-end 2019, there were (according to NCUA quarterly call report data) 1,953 FISCUs. By the end of the next year (2020), the number had fallen to 1,914. At mid-year 2021, total FISCUs were 1,886.
Federal credit union (FCU) numbers are also in decline, she noted – but there are still many more of those charters than FISCUs: 3,383 at year-end 2019, 3,185 at year-end 2020, and 3,143 at mid-year 2021.
LINK:
NCUA Posts 2022-2023 Proposed Budget, Sets Dec. 8 Public Briefing
(Nov. 24, 2021) Fair lending and consumer compliance are on the agenda for a Dec. 1 webinar hosted by NCUA, the agency said this week. Registration for the 3 p.m. ET event, to run about an hour, is now open. Topics include 2022 consumer compliance exam scope activities, fair lending updates, 2021 consumer compliance exam scope activities, and regulatory updates, including the rule on capitalizing unpaid interest and the 2021 COVID-19 temporary mortgage servicing rule … Speaking of educational sessions: Don’t forget the Dec. 9 (at 2 p.m. ET) NASCUS 101 — a free, short webinar where participants learn from the NASCUS team how to make the most of an association membership. Among the topics addressed: What NASCUS is, how NASCUS contributes to the entire credit union industry, how to engage in the regulatory and legislative processes, collaboration with peers, committee and working group involvement, customized communications and more. The webinar is open to all members and prospective members. While it is free to participate, registration is required … Federal banking agencies Tuesday released summaries of their plans to provide “greater clarity” through next year on whether certain crypto-asset-related activities conducted by banks are legally permissible and “related expectations for safety and soundness, consumer protection, and compliance with existing law and regulations.” According to the agencies, the emerging crypto-asset sector “presents potential opportunities and risks to banking organizations, their customers, and the overall financial system” … Here’s to a happy and safe Thanksgiving holiday for all!
LINKS:
Registration: NCUA 2021 Consumer compliance and fair lending regulatory update
Register here for NASCUS 101, Dec. 9, 2 p.m. ET.
Joint Statement on Crypto-Asset Policy Sprint Initiative and Next Steps (PDF)
(Nov. 19, 2021) Flexibility for board meetings originally extended to FCUs during the height of the coronavirus crisis will be extended in the new year, NCUA said this week. In Letter to Federal Credit Unions (LTCU) 21-FCU-06, the agency said a federal credit union (FCU), as allowed for in March of last year, may adopt at any time by a two-thirds vote of its board of directors a bylaw amendment allowing the board to meet virtually. The provision was approved by the agency in response to person-to-person limits on meetings during the coronavirus crisis … The use of stablecoins deserves a look – and issuance should be broader than just that by banks and credit unions – Federal Reserve Board Gov. Christopher Waller said this week. Referring to a report issued Nov. 1 by the President’s Working Group on Financial Markets that advocated only federally insured financial institutions could issue the digital payments, Waller said “there may be others that better promote innovation and competition while still protecting consumers and addressing risks to financial stability.” He said he disagrees that stablecoin issuance can or should only be conducted by federally insured banks credit unions “simply because of the nature of the liability … The controversy over OCC Nominee Saule T. Omarova (who faced a confirmation hearing Thursday) was illustrated by competing headlines issued in advance by the top Democrat and Republican members of the Senate Banking Committee. The headline of the press release issued by Chairman Sherrod Brown (D-Ohio) stated “Saule Omarova is Eminently Qualified to Lead the OCC.” The headline of the release issued by Ranking Member Pat Toomey (R-Pa.) stated: “I’ve Never Seen a Nominee with More Radical Ideas.” The banking industry has also expressed skepticism about the nominee. Omarova told the panel her priorities would be helping small- to medium-sized banks invest locally.
LINKS:
Federal Credit Union Meeting Flexibility in 2022 Due to the COVID-19 Pandemic
Witness statement: Dr. Saule T. Omarova (Comptroller of the Currency Designate)