Written by Alicia Nealon, Director of Regulatory Affairs
Welcome back to the third installment of our series of posts where NAFCU’s Compliance Blog will break down different portions of RBC2 and highlight the key issues that we are looking for your feedback on. Today’s topic is the treatment of CUSO activity.
One key change between this proposal and the original involves the risk-weighting of investments in CUSOs and loans to CUSOs. Under the original proposal, investments in CUSOs were assigned a risk-weight of 250 percent and loans to CUSOs were assigned a risk-weight of 100 percent. RBC2, however, would lower the risk-weight to 150 percent for equity investments in CUSO, and retain the 100 percent risk-weight for outstanding loan balances to CUSOs. Also, RBC2 will exclude loans and investments in CUSOs if those assets were already consolidated into the credit union’s statement of financial condition under generally accepted accounting principles (GAAP) - a move sought by NAFCU during the original proposal.
While RBC2 reduces the investment risk-weighting and accounts for the CUSOs consolidated into a credit union’s books, it continues to assign different risk-weights to investments in CUSOs and loans to CUSOs. Despite many commenters, including NAFCU, arguing that there should be only one risk-weight for CUSO activity and that it should not exceed 100 percent, NCUA retained different treatments for investments in CUSOs and loans to CUSOs. The agency explains that they are risk-weighted differently because they are treated differently in the event of liquidation or bankruptcy.
While NCUA lowered the risk-weight for investments in CUSOs, the proposed 150 percent risk weight still fails to consider the different types of services provided by a given CUSO. For example, an investment in a CUSO engaged in low-risk activities like providing compliance assistance would be assigned the same risk-weight as an investment in a CUSO engaged in mortgage or commercial loan underwriting. Despite being lowered, the proposed 150 percent risk-weight could still be improved to assess a more meaningful risk distinction between the risks various types of CUSOs pose…..at least that is my humble opinion, but I’d love to hear yours….
It is also worth mentioning that under FDIC's rules, equity investments that are less than 10 percent of a bank’s capital are risk-weighted at 100 percent. FDIC characterizes such investments as "insignificant." Because NCUA already restricts federal credit unions to only investing up to 1% of their assets in CUSOs in the aggregate, an argument could be made that credit union’s investments in CUSOs should be considered “insignificant” for the sake of the agency’s capital rules and be weighted at 100 percent as in the FDIC system. Again, my opinion...whats yours?
What does everyone think? Does your credit union believe the revised risk-weights reflect the real risks associated with investments in CUSOs and loans to CUSOs? Would the proposed 150 risk-weight force your credit union to reconsider current and future investments in CUSOs? Should investments in CUSOs be risk-weighted at 100 percent like FDIC equity investments?
As you consider these questions, be sure to take a look at NAFCU’s Regulatory Alert 15-EA-02, our Capital Reform Issue Page, or reach out to me directly (firstname.lastname@example.org, 703-842-2266) with your thoughts.
NAFCU Webcast. A Deep Dive into the Final Privacy Rule -You may be able to reduce your regulatory burden! Now, if your credit union meets the CFPB’s eligibility requirements, you can save money by posting your annual privacy notice online. Find out if your credit union meets the eligibility requirements, examine the posting requirements, and get detailed instruction on how to use the required model form with this good-news NAFCU webcast.