NAFCU Compliance Blog

Found in NCUA's Own Backyard: Federal Credit Unions Have the Power to Issue and Sell Securities

Written by Elizabeth M. Young LaBerge, Senior Regulatory Compliance Counsel

In 2014, NCUA issued a proposed rule amending its regulations to clarify that a federal credit union is authorized to securitize its assets by issuing and selling securities. The proposal sat on the backburner for a few years until recently.

At this month's NCUA Board Meeting, it was clarified that an amendment is not actually needed. NCUA had determined that federal credit unions already have the requisite authority and incidental power to issue securities.

To that end, on June 21, NCUA issued Legal Opinion Letter 17-0670. In this Legal Opinion Letter, NCUA set out a VERY thorough explanation of how it determines what activities are supported by the FCU Act, and why, under this analysis, the issuing and selling of securities meet all the relevant criteria for an incidental power activity.

Securitization of Assets as an Incidental Power

Section 721.2 of NCUA's regulations sets out a three-part test which NCUA uses to determine whether an activity is an incidental power. An incidental power is authorized if it:

(a) Is convenient or useful in carrying out the mission or business of credit unions consistent with the [FCU Act];

(b) Is the functional equivalent or logical outgrowth of activities that are part of the mission or business of credit unions; and 

(c) Involves risks similar in nature to those already assumed as part of the business of credit unions.

NCUA found that issuing and selling securities offers FCUs an important source of liquidity and reduced dependency on share deposits to fund loan demand. It offers flexibility in responding to competition and market demand, making it both convenient and useful to carrying out the business of credit unions.

NCUA also found that securitizing assets can increase the amount of credit available to members and create a vehicle for mitigating risk, making it a logical outgrowth of an important part of credit unions' mission and business: to provide credit for provident and productive purposes.

Finally, NCUA found that the risks associated with issuing and selling securities were the same risks already assumed by credit unions. Specifically, NCUA identified 5 types of risk attached with securitizing assets: credit risk, liquidity risk, reputation risk, operational risk and strategic risk. In each case, NCUA found that the accompanying risks were similar in nature to those risks already faced by federal credit unions.

Having met all three criteria, NCUA determined that the issuing and selling of securities is, in fact, already permitted by the FCU Act and NCUA's rules and regulations. Having made that determination, the Legal Opinion Letter turned to safety and soundness considerations.

NCUA's Expectations for Starting A Securitization Program

The Legal Opinion Letter also set out some expectations for credit unions engaging in asset securitization activities. Below are some expectations for the creation and implementation of a safe, sound and successful securitization program from the Legal Opinion Letter:

• An FCU should consult with legal counsel and other advisors to understand and give due consideration to all legal requirements, including those from other regulators and jurisdictions.
• Management must consider whether securitization policies are realistic and carefully designed to serve the membership.
• The credit union must have developed proper internal safeguards including management oversight, internal controls and quality control.
• Due diligence must be exercised before entering into third party agreements or devoting credit union resources to securitization activity.
• The risks associated with issuing and selling securities must be properly examined and assessed, and appropriate adjustments must be made in the credit union's risk management processes and insurance coverage to appropriately mitigation that risk.
• Section 721.4 requires an FCU to complete and submit an application to NCUA requesting to engage in securitization activity, as it is not an a preapproved incidental power.

We expect further guidance on the topic to be issued by NCUA in the next 3 to 4 months and will keep you updated.

NCUA Supervisory Focus for 2015; Consumer Compliance Outlook; Last Day for Holiday Savings

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

NCUA Supervisory Focus for 2015. NCUA recently released Letter to Credit Unions 15-CU-01, detailing the agency’s supervisory priorities for 2015. Areas of focus include cybersecurity, interest rate risk, Bank Secrecy Act compliance, and compliance with new regulations – NCUA’s liquidity rule, the CFPB’s Ability-to-Repay and Qualified Mortgage rule, and the CFPB’s TILA/RESPA Integrated Disclosure rule (after the rule goes into effect on August 1, 2015), are specifically mentioned.

In the area of cybersecurity, the focus is on proactive measures to protect data and members, as well as the ability to respond in the event of a breach. From the letter:

“NCUA field staff will focus on proactive measures credit unions can take to protect their data and their members, including:

• encrypting sensitive data;
• developing a comprehensive information security policy;
• performing due diligence over third parties that handle credit union data;
• monitoring cybersecurity risk exposure;
• monitoring transactions, and
• testing security measures.

Field staff will also be evaluating credit unions’ capacity to recover and resume operations in the event a security breach does occur. Appendix B to NCUA Rules and Regulations Part 748 provides guidance on developing an incident response program that can help a credit union react to a breach. These programs can help the credit union assess the nature and scope of an incident, determine when to contact law enforcement and notify members, and take steps to safely resume operations.

Credit union officials are also encouraged to review the online cybersecurity resources posted by NCUA and the FFIEC’s Cybersecurity and Critical Infrastructure Working Group to promote cybersecurity throughout the financial services industry.”

In the letter, NCUA also indicates that it is continuing to monitor trends in credit unions’ loan portfolios, and that it is streamlining exams for credit unions with assets up to $50 million and CAMEL ratings of 1, 2, or 3. For complete details, the letter is available in its entirety here.

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Consumer Compliance Outlook. The Fourth Quarter 2014 issue of the Federal Reserve’s Consumer Compliance Outlook is now available.  One of the articles, entitled “Managing Compliance Risk Through Consumer Compliance Risk Assessments,” discusses the use of consumer compliance risk assessments in identifying, measuring, monitoring, and managing consumer compliance risks associated with products and services.  Although geared towards institutions subject to the Federal Reserve Board’s Community Bank Risk-Focused Consumer Compliance Supervision Program, the article is a good read.

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Final day: Save $200 on any NAFCU Conference! Save $200 when you use code HOLIDAY on any of NAFCU’s 2015 conferences. It’s a great way to save big on NAFCU training; you can use code HOLIDAY as many times, and with as many employees, as you like! Our conferences are jam-packed with ideas designed to help you eliminate compliance headaches. View our conferences now and register using code HOLIDAY today; it’s your last day to save $200!

FHFA Proposes Changes to Federal Home Loan Bank Membership Eligibility

Written by Angela Meyster, Senior Regulatory Affairs Counsel

Last month, the Federal Housing Finance Agency released a proposal that would change the eligibility requirements for institutions, including credit unions, to join and maintain membership in Federal Home Loan Bank (FHLBs).  While NAFCU estimates that the current level of credit union involvement with FHLBs is relatively low (around 19% of all federally insured credit unions), the Federal Home Loan Banks do provide an important avenue for liquidity to which an increasing number of credit unions may look to as lending becomes tighter in the future and interest rates rise. The impact of this proposal on your credit union today may be minimal, but as your credit union plans for the future you may want to familiarize yourself with how the FHLB system works now and would work under the proposal.

So how does it work? Federal Home Loan Banks operate a bit like credit unions in that they are cooperative, member-owned institutions. There are twelve of them, organized by region, and they offer low-cost secured borrowing to their members in order to assist with liquidity, housing mortgage markets, and community development. Federal Home Loan Banks represent the largest collective source of home mortgage credit in the U.S. and they have been a source of significant assistance to participating credit unions.

The proposal would change a number of things about FHLB membership.  The three most important for credit union purposes are that it would:

• Require FHLB members and applicants to keep 1% of assets in “home mortgage loans;”
• Require FHLB members to have at least 10% of assets in “residential mortgage loans” on an ongoing basis; and
• Require FHLBs to determine member compliance on an annual basis, and terminate the membership of any credit union that has been noncompliant for two consecutive years.

Currently, there is no 1% requirement to keep assets in “home mortgage loans.”  Under the existing regime, a credit union, upon becoming a member, must be in the business of making “long term home mortgage loans,” but there is no quantitative component of making this determination.  Additionally, the 10% requirement to hold assets in “residential mortgage loans” currently only applies upon application for FHLB membership.  The proposal’s requirement to maintain this threshold asset allocation on an ongoing basis may pose issues for some credit unions that do not concentrate on mortgage lending.

In order to make compliance with the 1% requirement somewhat easier, however, the proposal would expand the definition of

“home mortgage loans” to include “any loan or interest in a loan that is secured by a first lien mortgage or any  mortgage pass-through security that represents an undivided ownership  interest in such loans or in another security that represents an undivided ownership interest in such loans.”

NAFCU has met with the FHFA to discuss aspects of the proposal and requested an extension of the comment deadline. NAFCU requested the extension because of the complexity of the rule, and the significant impact the rule could have on the industry and credit unions ability to establish and maintain membership in FHLBs. The comment period closure, originally slated for November 12, 2014, has been extended until January 12, 2015.  We continue to emphasize that the requirements set out in the proposal are unnecessary and prohibitive, especially for credit unions, which have not participated in the type of activities the proposal targets.  NAFCU has noted that the proposal would make it more difficult for credit unions to provide credit to their members and could prevent many credit unions who have  been long-time FHLB members from being able to continue their membership.

NCUA Releases Liquidity and Contingency Funding Supervisory Letter; Free Kick

Written by Ricardo Piñeres, Regulatory Compliance Counsel

On Friday, March 14, the NCUA released Supervisory Letter No. 14-03.  This letter provides federally-insured credit unions (FICUs) with helpful information regarding the exam process with respect to the NCUA’s liquidity and contingency funding rules that were released back in October and are located at 12 C.F.R. § 741.12.  The supervisory letter accompanies the release of the portion of the AIRES Questionnaire that has been added to cover the new liquidity and contingency funding rules.  The release of this information is especially helpful because examiners will be required to review the liquidity and contingency funding plans for all FICUs beginning on March 31 of this year.

The liquidity and contingency funding rules were promulgated as a way for the NCUA to ensure that FICUs of all sizes were conducting sound liquidity planning.  Furthermore, it required large FICUs (those with over $250 million in assets) to establish access to at least one federal source of contingent liquidity.

In order to be in compliance, FICUs with less than $50 million in assets must establish and maintain a basic written liquidity policy.  The policy must be approved by a FICU’s board of directors and must, at minimum, contain:

• The purpose and goals of liquidity management;
• Thresholds or limits for liquidity measures and reporting requirements;
• Primary and secondary contingency liquidity sources that the FICU can employ under adverse circumstances;
• Tools for liquidity risk management; and
• A provision for periodic review and revisions, as needed.

In addition to a written liquidity policy, in order to be in compliance, FICUs with assets of $50 million or more must have a contingency funding plan that clearly sets out strategies for addressing liquidity shortfalls in emergencies.  This plan must include policies, procedures, projection reports, and action plans designed to ensure that a FICU’s sources of liquidity are sufficient to fund operating requirements under contingent liquidity events.

Furthermore, FICUs with assets of $250 million or more must establish access to at least one contingent federal liquidity source.  The two federal liquidity sources that the NCUA has deemed allowable for this purpose are the Federal Reserve Discount Window and the Central Liquidity Fund.

In gauging whether or not they are in compliance with the rules, FICUs should consult the supervisory letter, the new AIRES questionnaire additions, and NCUA Letter to Credit Unions No. 13-CU-10 that contained guidance on how to comply with the liquidity and contingency funding rules.

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Free Kick.  The Premier League is heading into its final stretch of games with teams having 10 or fewer games left in the season (except for Manchester City and Sunderland who each have 11 games left).  While it appears that the Champions League spots are all but determined (it’s almost impossible to see any of the top 4 letting what is at least a 9-point gap back down to 5^th place Tottenham slip away), the championship and relegation battles will be fierce.

At the top end of the table, Chelsea leads by 4 points over both Liverpool and Arsenal, but Chelsea has played an extra game.  Manchester City trails the leaders by 6 points, but has played 3 games less than Chelsea and 2 less than both Liverpool and Arsenal.  As tight as the battle is at the top of the table, the battle to avoid relegation is even crazier with the bottom 8 teams are separated by just 6 points.

I am going to save my predictions for how it will all shake out in the Premier League for another time.  Instead, I’m going to honor March Madness and crown an EPL Madness Champion.  The teams have all been seeded according to the current Premier League standings with one exception – Manchester City has been given the benefit of the doubt in terms of their matches yet to be played and has been named the top seed.  Winners were determined solely by me taking into account recent form and my own personal biases.

Play-In Games: Crystal Palace, Hull City, Swansea, and Sunderland all advance.  West Brom, Fulham, Cardiff, and Norwich battle in a round-robin tournament for the one spot that is saved from relegation.  Cardiff survives and returns to the Premier League for next season.

Sweet 16: Manchester City, Arsenal, Liverpool, Everton, and Chelsea all advance comfortably.  Southampton squeaks by Newcastle 1-0 after a defensive resurgence.  Tim Sherwood’s lack of managerial experience shows again as he puts out an incoherent starting 11 that loses 2-1 to West Ham.  Aston Villa shock Manchester United in penalties and the David Moyes era comes to an end at Old Trafford.

Elite 8: Chalk reigns supreme as the top 4 seeds all move on.  In the only close fixture of the round, Arsenal has a lackluster offensive game, but the centreback combo Mertesacker and Koscielny clamp down to help the Gunners pull out a 1-0 victory.  Joe Hart has a sloppy game, but Man City’s attack is too much for Southampton.

Final 4: Man City’s offensive prowess is too much for Arsenal to handle; Man City eases to a 5-2 victory.  Liverpool continue their torrid run of late with 2 goals from Suarez and 1 from Sturridge to down Chelsea 3-1.

Championship Match: In front of a capacity crowd at Wembley, Man City storms out to a 2-0 halftime lead with goals from David Silva and Samir Nasri.  Liverpool strikes back in the second half to equalize the match with a pair of Luiz Suarez goals.  In the 87^th minute, Steven Gerrard heads home the winner off of a corner kick to give Liverpool the title.

Here is how the bracket shook out.

February 2014 NCUA Report; Interest Rate Risk; NCUA Economic Update

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

Recently, the NCUA released its February 2014 report. Featured articles include:

Office of Examination and Insurance Report: Riskier Credit Unions will Need More Capital Under Proposed Capital Adequacy Rule

Chairman’s Corner: Exams are a Two-Way Street

Office of Consumer Protection Report: Get Ready. Military and America Saves Week is Feb. 24 – March 1

Board Perspectives:  Teddy, Moses and Buford; It’s Never too Early to Stop Being Late

Board Actions: Final Derivatives Rule Approved; Board Also Approves NCUA Strategic Plan for 2014-2017; Renews Interest Cap

Office of the Chief Economist Report: Long-Term Investments Resulting in Increased Supervisory Actions

Region III Report: Frequently Asked Questions About Mergers

Office of Examination and Insurance Report: Get a Better Understanding of NCUA’s Capital Adequacy Rule with Our Online Calculator

OSCUI Workshop and CEO Bootcamp Schedule

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Interest Rate Risk. Interest rate risk is a top supervisory focus for NCUA in 2014, as noted in Letter to Credit Unions 14-CU-02.  Along these lines, the article in NCUA's February 2014 report from the Office of the Chief Economist, Long-Term Investments Resulting in Increased Supervisory Actions, notes that supervisory action has been necessary in some “outlier” cases, and cautions credit unions in managing their interest rate risk.  From the report:

“For credit unions, investments are primarily meant to be safe places to store excess liquid funds. Once liquidity objectives are satisfied, investments also serve as a source of additional income to augment core earnings. The recent shift toward longer-term investments may indicate a trend away from liquidity management toward yield by taking on more risk.

‘The concern is that credit unions are reaching for yield in order to supplement earnings,’ NCUA Chief Economist John Worth said. ‘It is an understandable response, given the compression of net-interest margins in the low-rate environment. But the nature of the interest-rate environment, along with credit unions reaching for yield, has the potential to create a perfect storm that could have a substantial drag on future earnings, and make some credit unions insolvent.’ The pace of these portfolio changes has Worth and Cole concerned that credit unions are increasingly ignoring the perils of interest-rate risk in order to meet current earnings objectives. In the past year alone, while total investments have remained at 28 percent of assets, investments with maturities of less than three years dropped 11 percent or $20 billion, while investments with maturities of more than three years rose 33 percent or $30 billion.

[…]

The current interest rate environment—with short-term rates near zero and long-term rates at historic lows—is unprecedented. As a regulator, NCUA does not have a specific view on interest rates. Instead, NCUA believes credit unions’ balance sheets should be resilient in a wide variety of rate environments.

However, given the unusually low current interest rates and the recent improvements in the economy, there is much evidence to suggest that a transition to a rising and more volatile interest rate environment is already underway. Therefore, especially in the near term, credit unions should pay particular attention to their exposure to rising rates.

NCUA strongly urges credit unions not to forsake the role of liquidity in investment-portfolio management or to ignore interest rate-risk implications if they invest in higher-risk instruments to maximize current income.”

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NCUA Economic Update Video.   Last week, NCUA released its latest economic update video. In addition to reiterating interest rate risk concerns, the video discusses the labor market and consumer spending. The video is available on NCUA’s YouTube channel here.

NCUA’s Final Rule on Liquidity and Contingency Funding Plans

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

Recently, we blogged about NCUA’s final rule on liquidity and contingency funding plans. The rule, which applies to federally insured credit unions (but not corporate credit unions), is effective March 31, 2014.

Earlier this week, NCUA released a video on its YouTube channel to assist credit unions in complying with the rule. The video features Larry Fazio, Director of the Office of Examination and Insurance, and J. Owen Cole, Jr., Director of the Division of Capital and Credit Markets.

NCUA also issued Letter to Credit Unions 13-CU-10 to advise federally insured credit unions of their responsibilities under the final rule, explain the impetus for the rule, and provide guidance on certain liquidity planning expectations and provisions of the rule.  Here’s an excerpt from the letter discussing key liquidity sources:

“What are the key sources of liquidity NCUA looks for in credit union plans?

There are three categories of liquidity sources that apply to liquidity planning. Each of these sources is relevant to the underlying safety and soundness of a credit union’s liquidity management program. Essentially, these sources act as layers of liquidity protection and function similar to a series of financial firewalls. The three categories are:

1.  On-balance-sheet liquidity. Maintaining a balance-sheet cushion of highly liquid assets is your first line of protection. It is essential for credit unions of all sizes to hold an adequate safeguard of cash and cash equivalents (such as short-term deposits and short-maturity Treasuries). A simple rule of thumb is to identify the largest liquidity outflow your credit union has ever experienced and how long it persisted. Then set your on-balance-sheet liquidity target based on that experience. This liquidity cushion will buy you some time to avoid service disruptions and enter external funding arrangements if they become necessary.
2. Access to market sources of funds. Your second line of protection is to be in a position to borrow from market counterparties. You can build borrowing relationships with a corporate credit union, a correspondent bank, a Federal Home Loan Bank, or with repurchase agreement counterparties (or all of these), to name a few. You need to keep in mind your credit union’s ability to borrow from market funding sources will require unencumbered assets acceptable to lenders, which can be readily pledged against your loan. Larger credit unions with greater potential funding needs should have multiple stable borrowing sources and a clear understanding of which assets can be pledged.
3.  Contingent federal liquidity providers. The third line of protection is access to a contingent federal liquidity provider such as the Discount Window or CLF. The Discount Window and CLF exist to provide backup liquidity in circumstances where on-balance-sheet liquidity and market funding sources prove inadequate. While sparingly used, the Discount Window and CLF have proven to be dependable sources of liquidity in times of crisis or unexpected events. Like the funding sources, the Discount Window and CLF are both collateral-based lending facilities. All loans must be fully secured with a first priority security interest.

Generally, a credit union responding to liquidity demands will work through these sources in the above order. Your credit union needs to specify in its plan which sources it can access and the priority of steps to follow. NCUA recognizes liquidity resources may have changed for many credit unions because of the recent financial crisis. This means you may need to establish new relationships with market counterparties and contingent federal liquidity facilities.

For most credit unions, the first two sources of liquidity are already integrated into their day-to-day operations. However, because emergency liquidity is not an everyday need, most credit unions have not yet chosen to establish relations with a contingent federal liquidity source. Of the credit unions that are now required to access a contingent federal liquidity source, slightly more than half have already established relations with the Discount Window and/or CLF.”

See Letter to Credit Unions 13-CU-10 for complete details, including NCUA’s recommended timetable for compliance action steps.  NAFCU’s Regulatory Affairs Team has also prepared a Final Regulation Summary (13-EF-27) for NAFCU members.

Thank You; NCUA’s October 2013 Board Action Bulletin – Two Finals and a Proposal; Remittance Transfer Effective Date Alert

Written by JiJi Bahhur, Director of Regulatory Compliance

Thank You.  I wanted to extend a thank you to all attendees and presenters that joined us during last week’s sold-out Regulatory Compliance Seminar. As the compliance challenges continue, the ability to learn from each other and discuss common issues and concerns will continue to be an invaluable resource in the credit union industry and help everyone stay up-to-date on the latest requirements and interpretations.

Thanks again for making this year's Compliance Seminar a success.  When the group photo is available, I'll be sure to share.

NCUA’s October 2013 Board Action Bulletin.  Last Thursday, the National Credit Union Administration (NCUA) Board (Board) held its October 2013 Board meeting.  Three items were unanimously approved during the Board’s open session:

• A final rule requiring all federally insured credit unions to plan for liquidity events. Credit unions with assets exceeding $250 million need to have access to NCUA’s Central Liquidity Facility, the Federal Reserve’s Discount Window, or both.

• A final rule requiring all federally insured credit unions to electronically file Call Report information with NCUA. The rule will reduce operating costs and result in more accurate and timely credit union data.

• A proposed rule to protect the National Credit Union Share Insurance Fund by requiring annual stress tests at federally insured credit unions with assets exceeding $10 billion.

Other items on the open meeting agenda included:

• Board Briefing, Proposed Interagency Policy Statement, Joint Diversity Standards for Regulated Entities.

• Board Briefing, Proposed Interagency Rule, Part 760, Loans in Areas Having Special Flood Hazards.

• Quarterly National Credit Union Share Insurance Fund Report.

For a deeper look into the items discussed, ruled and briefed on during this meeting, take a look at NCUA’s Board Action Bulletin here, but I’d like to focus on the final Liquidity and Contingency Funding Rule.  The final rule – affecting section 741.12 of NCUA’s rules and regulations – requires all federally insured credit unions to take specific steps to ensure appropriate risk management and access to liquidity. 

In its Board Action Bulletin, the NCUA provides a helpful table summarizing the general requirements based on credit union size.

 

Credit Union Asset Size	Liquidity Rule Requirement
Under $50 million	Federally insured credit unions in this group must maintain a basic written liquidity policy. Approved by a credit union’s board, the policy must provide a framework for managing liquidity and a list of contingent liquidity sources that can be employed in emergency situations.
$50 million or more	In addition to a written liquidity policy, federally insured credit unions in this group must have a contingency funding plan that clearly sets out strategies for meeting emergency liquidity needs.
$250 million or more	In addition to a written liquidity policy and contingency funding plan, federally insured credit unions in this group must establish access to at least one contingent federal liquidity source: either NCUA’s Central Liquidity Facility, the Federal Reserve’s Discount Window, or both.

 

It should be noted that the final rule raises the highest asset threshold, which requires access to a federal liquidity provider, to $250 million from the $100 million in the proposed rule.

Effective March 31, 2014, the final rule is available online here. The NCUA published a Letter to Credit Unions (LCU) that provides guidance on how credit unions can comply with this regulation, including a timeline to ensure credit unions are in compliance by the effective date.  Also, NAFCU will issue a Final Regulation (NAFCU log-in required), which will be available here. 

Remittance Transfer Effective Date Alert.  Just a friendly reminder: today – October 28, 2013 – is the effective date for the final remittance transfer rule. 

Research Tip: Tracking Rulemakings in the Federal Register

Written by Steve Van Beek

We often get questions about the status of certain rulemakings.  For example:

• Has NCUA finalized their Emergency Liquidity proposal?

• Has the CFPB finalized (for the third time) the Remittance Transfer proposal?

• What about NCUA's CUSO proposal?

• Loan Participations?

You get the picture.  To help with this, we created a Pending Regulations Chart which can be found at the end of our Compliance Calendar.  You do not need to be a NAFCU member to view the Compliance Calendar; however, some of the linked resources are for members-only.  

***

Federal Register.  There is also a great way to track the rulemakings in the Federal Register automatically.  You can subscribe to the topic "credit unions" to be sure you are emailed whenever a credit union-related rulemaking is published in the Federal Register.  This is especially important as - we are all aware - rulemakings impacting credit unions do not come from just NCUA.  Of course, this isn't a perfect science as some rules might not be coded with the "credit union" topic.  But, I've found it works pretty well.

To subscribe, start out be going to the "credit union" topic page.  Click the "Subscribe" button on the right-hand side.

From here, you'll get a pop-up box that you can enter your e-mail address (or subscribe via RSS feed).

You can choose to receive all "credit union" topics or only those labeled as "significant actions."  For me, I'm not one to trust the self-labeling of "significant" by the regulators - so I subscribe to the broader group.

Have a great week!

NCUA Closes U.S. Central Bridge; NAFCU's Offices Closed

Written by Michael Coleman, Regulatory Compliance Counsel

We will keep today's post short and sweet, for those of you on the East Coast in the areas affected by Hurricane Sandy, stay safe. 

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Yesterday, October 29th, 2012, NCUA closed U.S. Central Bridge Corporate Federal Credit Union (U.S. Central Bridge).  Regarding the closure of U.S. Central Bridge, the NCUA press release quotes NCUA Chairman Matz:

“'We now have a stronger, safer system,' ... 'We have set high standards for corporate credit union investments, capital and governance, and we’ve created a new operating environment for wholesale corporate credit unions to serve retail credit unions. The decisions NCUA and credit unions made have produced a solid foundation for the future.'"

The press release also emphasizes  that with the closure of the U.S. Central bridge, many credit unions who had access to emergency liquidity from the Central Liquidity Facility (CLF) through U.S. Central Bridge will no longer have access unless they join the CLF directly. In July, 2012, NCUA proposed a rule requiring credit unions to plan for or maintain access to emergency liquidity. The press release summarizes the requirements of the proposed rule:

"The proposed rule incorporates a three-tiered approach, based on the size of the federally insured credit union:

• Credit unions under $10 million in assets would have to maintain a written liquidity policy approved by their board. The policy would provide a basic framework for managing liquidity and have a list of contingent liquidity sources for use in emergency situations.
• Credit unions with more than $10 million in assets would have to establish a formal contingency funding plan that clearly sets out strategies for addressing liquidity shortfalls in emergency situations.
• Credit unions with more than $100 million in assets would have to demonstrate access to at least one of the following three options for a backup federal liquidity source:
  • becoming a direct member of the CLF;
  • becoming an indirect CLF member through a CLF agent; or
  • establishing direct borrowing access to the Federal Reserve’s Discount Window."

The press release also quotes NCUA Chairman Matz on the need for this proposed rule: 

“'Credit unions have access to everyday liquidity needs through their balance sheet, and through correspondent relationships such as corporates or Federal Home Loan Banks,' Chairman Matz noted. 'But in the event of another systemic crisis, it is also critical for larger credit unions to have demonstrated access to a dependable source of government-backed emergency liquidity, such as NCUA’s CLF or the Federal Reserve Discount Window. That’s why the NCUA Board proposed the emergency liquidity rule.'”

The press release also provides a link to a video on the CLF on NCUA's YouTube channel.

***

NAFCU Closed.  NAFCU follows the Federal Government Operating Status and our offices will continue to be closed today, October 30th, due to Hurricane Sandy.  NAFCU Members:  If you have compliance questions, please email us at [email protected].  If you call, please leave a voicemail and we'll get back to you as soon as we can.   

For those in and around the Hurricane area, be safe!

 

NCUA Proposes Rule on Maintaining Access to Emergency Liquidity

Written by Bernadette Clair, Regulatory Compliance Counsel

NCUA’s proposed rule requiring federally insured credit unions (FICUs) to plan for or maintain emergency liquidity has been published in the Federal Register.  The proposed rule, approved at NCUA’s July 24^th Board Meeting, is intended to address liquidity concerns arising out of the anticipated closing of U.S. Central Bridge Corporate Credit Union (U.S. Central Bridge) later this year in October 2012.

Credit unions that have access to the Central Liquidity Facility (CLF) by belonging to a corporate credit union that is part of the agent group headed by U.S. Central Bridge will no longer have this source of backup liquidity once U.S. Central Bridge closes.  Subsequently, these credit unions will need to establish alternative means of backup liquidity, such as finding another agent through which to maintain membership in the CLF, or maintaining membership in the CLF directly.

 The proposed rule sets forth a three-tiered approach based on the asset size of the FICU. Here are the highlights:

Credit unions under $10 million in assets would have to maintain a written liquidity policy approved by their board and a list of contingent liquidity sources that can be employed under adverse circumstances.

Credit unions with $10 million or more in assets would have to establish a formal contingency funding plan (CFP) that clearly sets out strategies for addressing liquidity shortfalls in emergency situations.  The CFP must address, at a minimum, the following:

• The sufficiency of the institution's liquidity sources to meet normal operating requirements as well as contingent events;
• The identification of contingent liquidity sources;
• Policies to manage a range of stress environments, identification of some possible stress events, and identification of likely liquidity responses to such events;
• Lines of responsibility within the institution to respond to liquidity events;
• Management processes that include clear implementation and escalation procedures for liquidity events; and
• The frequency that the institution will test and update the plan.

 Credit unions with more than $100 million in assets would, in addition to maintaining a CFP, have to demonstrate access to at least one of the following three options for a backup federal liquidity source:  becoming a member of the CLF; becoming a CLF member through a CLF agent; or establishing direct borrowing access to the Federal Reserve’s Discount Window.

NAFCU’s Regulatory Affairs team is preparing a Regulatory Alert for members.  The deadline for submitting comments on the proposed rule is September 28, 2012.