(Dec. 17, 2021) The “normal operating level” (NOL) of the NCUSIF – the level at which NCUA considers whether it needs to inject more reserves into the fund to cover looming losses, primarily through premiums – was set at 1.33% by the agency board Thursday. The decision was made after the agency dropped two of eight factors it uses to set the NOL as “no longer necessary” (the modeled potential decline in value of the NCUSIF’s claims on the corporate asset management estates; and to account for a potential projected equity ratio decline through the end of the following year without an economic downturn) … Robert (“Rob”) Schmidt is the new director of the Alaska Division of Banking and Securities; he succeeds James McConnell who left in October … The OCC finalized rescission of its 2020 rule implementing the Community Reinvestment Act (CRA), reverting agency rules to those adopted in 1995 and followed by its fellow federal banking regulators. The 2020 CRA rule was rescinded, the OCC said, to “facilitate the ongoing interagency work to modernize the CRA regulatory framework and promote consistency for all insured depository institutions.”

LINK:

Share Insurance Fund 2022 Normal Operating Level

(July 30, 2021) Any discussion about the normal operating level (NOL) of the federal credit union share insurance fund must acknowledge that the actual equity ratio of the fund is inextricably tied to NCUA’s budget and the overhead transfer rate (OTR), NASCUS wrote in a comment letter this week.

Further, NASCUS wrote, if an elevated NOL is deemed necessary by the agency, NCUA should take steps to reduce the OTR, restoring millions of dollars toward maintaining the NOL and increasing the potential for distributions to stakeholders.

NASCUS was responding to a comment call by NCUA, issued in May, on the agency’s policy guiding determination of the NOL. Now, the NOL (the target equity ratio set for the insurance fund by the NCUA Board) is set at 1.38%. Under the law, the board may set the NOL at anywhere between 1.2% to 1.5%. If the equity level is greater than the NOL, the NCUA Board may vote to make a distribution back to credit unions of the equity in the fund above the NOL (as it did two years ago).

The agency said in May that its re-evaluation of NOL policy was prompted by two events: the current economic landscape (along with the impact of current forbearance programs ending, and likely evictions rising – both perhaps leading to loan underperformance), and pending events related to the corporate asset management estates and end of the NCUA Guaranteed Notes (NGN) Program. Staff noted then that the NOL will no longer have to take into consideration the NGNs after June, since the last of the notes will have been, by then, liquidated (which they were).

The agency sought comments in a variety of different areas, including when public comment should be sought when a change to the NOL is proposed, and the basis for evaluating the insurance fund’s performance.

NASCUS also wrote that it supported continuing the opportunity for stakeholders to participate in considerations of even modest 1 basis point adjustments to the NOL, as well as on the OTR and other adjustments or changes to the NCUSIF.

“Given the cost of maintaining the NCUSIF’s equity ratio at the NOL as determined by the NCUA Board is borne by credit union stakeholders, we believe the policy of notice and public comment before any change of 1 basis point or greater in the NOL should be maintained,” NASCUS wrote.

Writing that the state system supports a “counter-cyclical approach to funding the NCUSIF based on annual modeling utilizing scenarios developed by the Federal Reserve,” NASCUS stated that it supports a moderate recession as the model, with the use of the Federal Reserve baseline and adverse (when available) scenarios to test the model. “NASCUS encourages NCUA to factor into its modeling the historical performance of the NCUSIF and the credit union system to better calibrate the true needs of the SIF while returning as much money to credit unions as prudent for deployment in service of members,” NASCUS wrote.

But discussion of the NOL is not complete, NASCUS asserted, without admitting that the actual equity ratio of the SIF is inextricably tied to NCUA’s budget and the Overhead Transfer Rate (OTR).

“The simple fact is that NCUA has withdrawn over $1.7 billion from the SIF in the past decade ($1 billion of that in just the past five years) to fund agency operations,” NASCUS wrote. “Without question, the NCUSIF should fund its own administration and a robust supervisory program that identifies and mitigates material risk in the federally insured credit union system. But the fact remains that an elevated NOL, combined with the OTR, cannibalizes SIF investment earnings and denies credit unions SIF distribution opportunities.”

The association indicated that the agency should reduce the OTR, which would restore millions of dollars toward maintaining the NOL and increase the potential for distributions to stakeholders.

“Next to setting the OTR, establishing the NOL is one of the most consequential policy determinations administered by the NCUA,” NASCUS wrote. “Over the past several years, NCUA has taken steps to bring more transparency to the OTR and NCUSIF. NASCUS applauds and supports those efforts. We encourage NCUA to continue enhancing the transparency related to the accounting of the NCUSIF, the OTR, and modeling and factors contributing to the determination of the NOL.”

LINK:

NASCUS Comment: Policy for Setting the Normal Operating Level

(May 21, 2021) In a related move Thursday, the NCUA Board voted unanimously to seek public comments on its policy that guides the determination of the insurance fund’s Normal Operating Level (NOL).

Now, the NOL (the target equity ratio set for the insurance fund by the NCUA Board) is set at 1.38%. Under the law, the board may set the NOL at anywhere between 1.2% to 1.5%. If the equity level is greater than the NOL, the NCUA Board may vote to make a distribution back to credit unions of the equity in the fund above the NOL (as it did two years ago).

According to NCUA staff, a re-evaluation of the NOL policy is prompted by two events: the current economic landscape (along with the impact of current forbearance programs ending, and likely evictions rising – both perhaps leading to loan underperformance), and pending events related to the corporate asset management estates and end of the NCUA Guaranteed Notes (NGN) Program. Staff noted that the NOL will no longer have to take into consideration the NGNs after June, since the last of the notes will have been, by then, liquidated.

The agency said it is looking for looking for comments on a variety of subjects regarding the NOL policy, including:

Should a moderate or severe recession be the basis for evaluating the insurance fund’s performance?

Should a five- year period — or a longer or shorter period – be used for modeling the fund’s performance?
How should the agency use the modeled potential decline in value of the fund’s claims on the corporate asset management estates going forward until the estates are fully resolved?
Should the projected equity ratio decline continue to be incorporated into the NOL analysis through the end of the following year without an economic downturn (or should this period be longer or shorter, or not factored into the analysis at all)?

A 60-day comment period was set for public input.

LINK:
Request for Comment, Share Insurance Fund Normal Operating Level Policy

(May 14, 2021) A final rule on investments in derivatives by credit unions, and two items that could have a significant impact on a savings insurance premium for credit unions, are all on the agenda for the NCUA Board when it meets on Thursday.

The final rule on derivatives follows up on a proposal from the agency issued in October, which was designed to make current regulations less prescriptive and more principles-based. The proposal would also expand federal credit unions’ (FCUs) authority to purchase and use derivatives as part of their interest-rate risk (IRR) management.

NASCUS, in its comment letter on the proposal filed with the agency in late December, said the state system supports the proposal, but made two recommendations to make the rule more flexible for the needs of state credit unions. First, NASCUS said the agency should eliminate redundant supervisory notice requirements where applicable. NCUA, the association wrote, should provide an exemption from its notice requirement for FISCUs in states where pre-approval or pre-notification is required to be given to the state regulator.

Second, NASCUS wrote that the agency should incorporate exempt derivatives transactions directly into part 741.219 of its rules – the section that covers FISCUs and investment requirements. Specifically, NASCUS “strongly recommended” that — to facilitate FISCU compliance – the agency should incorporate the excluded transactions under the proposal (under part 703.14 of NCUA rules, which only apply to FCUs) directly into a new subpart (d) of section 741.219. Restating the excluded transactions directly in the relevant FISCU rule, NASCUS wrote, “is a better organizational framework that more clearly communicates to FISCUs the required compliance obligations.”

NASCUS also acknowledged in its letter that a key part of the proposal is continued recognition by NCUA of the primacy of state law in determining investment authority for FISCUs.

Regarding the insurance fund and the future of a premium, the NCUA Board will also consider at next week’s meeting:

Issuing a comment request on the National Credit Union Share Insurance Fund’s (NCUSIF) “normal operating level” (NOL), which is the reserve level at which the board has determined the fund can adequately cover any losses presented to the fund. The NOL plays a key role in determining whether a premium will be charged to credit unions to bolster the fund’s reserves. The subject of a premium has been the focus recently of considerable discussion. However, NCUA Board Chairman Todd Harper has repeatedly said the question is increasingly not if, but when, a premium will be charged. Separately (but related): In September, the FDIC Board adopted a restoration plan for the agency’s Deposit Insurance Fund (DIF) which — much like the NCUSIF — had been diluted by the massive influx of savings as a result of the financial impact of the coronavirus crisis. The FDIC plan would restore the fund’s reserve ratio to at least 1.35% of reserves to total insured funds within eight years, as required under federal law — but would require no “extraordinary measures” – such as increasing assessment rates. Instead, the agency said last fall that it would, over the next eight years: monitor deposit balance trends, potential losses, and other factors that affect the reserve ratio; maintain the current schedule of assessment rates for insured banks and other institutions; and provide updates to its loss and income projections at least semiannually.
A quarterly report on the NCUSIF, which should include details on the latest equity level of the fund, which also has an impact on a future premium. Lately, the equity level (the amount of total reserves in the fund relative to total savings insured) has been dropping as insured savings have been growing, spurred by member deposits of federal stimulus payments and other savings. Federal law requires that if the NCUSIF equity ratio drops below 1.2%, the board must adopt a “restoration plan” to bring the equity ratio back up to the fund NOL – including a premium. The insurance fund closed 2020 with an equity level of 1.26%, well below the current NOL of 1.38% (but an improvement from earlier in the year when the equity level stood at just 1.22%).

The board meeting gets underway at 10 a.m. ET; audio of the meeting will be live-streamed via the Internet.

LINK:
NCUA Board meeting agenda, May 20

(Dec. 18, 2020) In other action at Thursday’s meeting, the NCUA Board issued one final rule and three proposed regulations – with three of those approved on split votes after Board Member Todd Harper (the lone Democrat appointee on the board) voted in opposition all three times.

The board:

Approved (unanimously), an extension to Dec. 31, 2021 for a temporary final rule that increases the maximum aggregate amount of loan participations that a federally insured credit union (FICU) may purchase from a single originating lender without seeking a waiver from NCUA to the greater of $5 million or 200% of the FICU’s net worth (up from the greater of $500 million or 100% of the FICU’s net worth). The rule had been slated to expire at year’s end. The temporary rule, adopted by the NCUA Board as a relief measure for credit unions in the midst of the coronavirus crisis last spring, took effect April 21.
Issued a proposed rule (on a 2-1 vote) on field of membership shared facility requirements (under Part 701, Appendix B, of agency rules) that NCUA said is intended to modernize requirements related to service facilities for multiple common bond (MCB) federal credit unions (FCUs). NCUA said the proposal includes any shared branch, shared ATM, or shared electronic facility in the definition of “service facility” for an MCB FCU that participates in a shared branching network. “The FCU need not be an owner of the shared branch network for the shared branch or shared ATM to be a service facility,” the agency said. “These changes would apply to the definition of service facility both for additions of select groups to MCB FCUs and for expansions into underserved areas.” Harper said he questioned the proposal’s ability, without changes, to increase service to underserved areas. The proposal will have a 30-day comment period.
Released a second proposed rule (on a 2-1 vote), this one on mortgage servicing rights (under Parts 703 and 721 of agency rules), which would amend the agency’s investment regulation to permit FCUs to purchase mortgage servicing rights from other federally insured credit unions subject to certain conditions. Harper called the proposal “half baked,” but said he could find a way to support a final rule if changes were made. The proposal will be issued with a 30-day comment period.
Advanced yet a third proposed rule – this one on overdraft policy (under Part 701 of NCUA rules) – also on a 2-1 vote. The proposal would remove the requirement that an FCU’s written overdraft policy establish a 45-day time limit for a member to either deposit funds or obtain an approved loan from the FCU to cover each overdraft, and replace it with a requirement that the written policy must establish a specific time limit that is “both reasonable and applicable to all members for a member either to deposit funds or obtain an approved loan from the FCU to cover each overdraft.” In May, the board tabled a proposed interim final rule to let FCUs decide how long members have to resolve account overdrafts. The proposal was tabled after failing to win a second from one of two board members when Chairman Hood asked for it (both members Harper and McWatters expressed opposition to a final rule). Back in May, Harper said the rule would (among other things) allow credit unions to garnish members’ income – including any economic stimulus relief funds – to pay off overdraft debt. Harper reiterated his objections Thursday (“I couldn’t support it then, I can’t now,” he said). Comments are due 30 days after publication in the Federal Register.

The board also set the “normal operating level” for the National Credit Union Share Insurance Fund (NCUSIF) at 1.38 for the coming year, no change from 2020. The NOL represents the target level of reserves in the fund relative to shares insured (referred to as the equity level). Generally, it is the level of reserves the board believes is needed to deal with anticipated losses from credit unions (if any) throughout the year, without lowering the reserving rate below 1.20%, the point at which an insurance premium would be required.

Along those lines, staff told Board Member Harper that it estimates the equity level of the fund at year-end will be 1.32% — well above the level at which a premium would be required. Agreeing with staff that chances of a premium in 2021 now look “next to zero,” Harper said that would be “welcome news to many credit unions.”

LINKS:
Temporary Final Rule, Regulatory Relief in Response to COVID-19

Proposed rule, Field of Membership Shared Facility Requirements

Proposed Rule, Mortgage Servicing Rights

Proposed Rule, Part 701, Overdraft Policy.

Board Briefing, Share Insurance Fund 2021 Normal Operating Level