NAFCU Compliance Blog

RBC-Nuts and Bolts, pt 3

Written by Alicia Nealon, Director of Regulatory Affairs

Happy Friday and welcome back to the third installment of our RBC series where NAFCU’s Compliance Blog will break down different portions of the final rule in order to help our compliance colleagues learn the basic framework of NCUA’s new RBC requirements.  Over the past 22 months, credit unions and NCUA alike have lived what can only be dubbed ‘the RBC Saga.’ While this saga features many actors and subplots, one that I want to highlight today is investments in CUSOs, as this asset class underwent significant character development and emerged as one of the fan favorites in the saga’s conclusion. For today’s post, let’s take a look at how the investment risk weight in CUSOs unfolded.

TAKE 1: In RBC 1, there was a 250 percent risk weight for investments in CUSOs with no allowance made for wholly owned, consolidated CUSOs. Understandably, credit unions were not a fan of this. The stage was set for a great battle.

TAKE 2: In the rule’s second iteration, NCUA clarified there would be no separate applicable CUSO risk weight if the CUSO was consolidated into a credit union’s financial statement under GAAP. However, if GAAP didn’t allow an equity investment in a CUSO to be consolidated, then equity investments in CUSOs were assigned a risk weight of 150 percent. The plot was improving, but credit unions were still not impressed.    

TAKE 3 - THE FINAL CUT: A fan favorite, this installment maintained that investments in CUSOs fall under category 6 and are still assigned a risk-weight of 150 percent. HOWEVER, a credit union could apply a risk weight of 100 percent for investments in CUSOs if its overall equity exposure deemed to be “non-significant.” NCUA estimates 95 percent of credit unions with such investments will receive the lower risk weight. So this begs the question, how do I determine if my credit union’s equity exposure is “non-significant?”

For credit unions that are not required to consolidate their CUSO investments under GAAP, a credit union has non-significant equity exposures if the aggregate amount of its equity exposure does not exceed 10 percent of the sum of the credit union’s capital elements of the risk-based capital numerator. When determining the aggregate amount of its equity exposures, a credit union must include total amounts of the following:

• Equity investments in CUSOs,
• Perpetual contributed capital at corporate credit unions;
• Nonperpetual capital at corporate credit unions, and
• Equity investments subject to a risk weight in excess of 100 percent.

It is important to note two things with this provision:

1. This approach is available for CUSOs not subject to consolidation under GAAP; and
2. This is an ‘all-or-nothing’ approach. If a credit union’s aggregate equity exposure exceeds 10 percent of the sum of the credit union’s capital elements of the risk-based capital numerator, then that credit union must disaggregate each equity exposure listed, and individually weight each exposure based on the appropriate risk weights.

It might be helpful to walkthrough two examples of how this might apply, and how slight variances can have ripple effects throughout the determination. For this example, imagine a credit union has capital in the numerator portion of the RBC ratio totaling $100m. (For a refresher on how to calculate the numerator portion of RBC ratio, see here.)

In scenario 1, this credit union has $1 million invested in a CUSO, as well $4 million each in perpetual contributed capital and nonperpetual capital at corporate credit unions, and $1 million of publically traded equity. These equity investments total $10 million, which does not exceed the 10 percent threshold of numerator portion of the ratio. Therefore, these equity investments can all be treated as non-significant equity investments and weighted at 100 percent.

In scenario 2, the credit union still has $1 million equity each in a CUSO and publically traded instruments, but now, it has $5 million each in perpetual contributed and nonperpetural capital at corporate credit unions. This means that the credit union’s equity investments total $12 million, which exceeds that 10 percent threshold. Now, the credit union must disaggregate and weigh each equity asset according to its standard risk weight (ie., nonperpetual at 100 percent, CUSO investments and perpetual contributed capital at 150 percent, and publically traded equity at 300 percent). Just by increasing its nonperpetual and perpetual capital at corporate credit unions, the credit union can no longer risk weight its CUSO investment at 100 percent.

As always, for more information on the final RBC rule, please be sure to take a look at NAFCU’s Final Regulation 15-EF-15, our Capital Reform Issue Page, or reach out to me directly ([email protected], 703-842-2266) with any RBC questions.  

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Servicemembers Civil Relief and Military Lending Acts – Are We There Yet?

Live Webcast: Thursday, November 12 | 2:00 p.m. – 3:30 p.m. EST

These military-focused acts are easy to miss; often, credit unions think they’ve done enough when they’ve barely just scratched the surface of compliance. Attend this webcast to explore and understand the potential regulatory concerns of these acts. You’ll receive an overview of the proper policies, procedures, and processes you need to have in place to withstand an SCRA or MLA violation challenge—and to protect the rights of our servicemembers.

RBC-Nuts and Bolts, pt 2

Written by Alicia Nealon, Director of Regulatory Affairs

Boo! Happy Halloween and welcome back to the second installment of our RBC series where NAFCU’s Compliance Blog will break down different portions of the final rule in order to help our compliance colleagues learn the basic framework of NCUA’s new RBC requirements.  One of the phrases that dominated the RBC conversation for the past 22 months has been “two-tiered” structure.  In honor of Halloween, I thought today’s topic should be unmasking what the “two-tiered” structure really means.

Part 702 currently evaluates a complex credit union’s risk-based net worth (RBNW) on a “pass/fail basis.” Each credit union calculates its RBNW based on its portfolio of assets, using weighting prescribed by Part 702.  That calculation yields an RBNW percentage that is then compared to a credit union’s net worth ratio. A complex credit union’s net worth ratio must exceed its RBNW requirement.  If a credit union’s net worth ratio falls below its RBNW requirement, it will be deemed “undercapitalized.” 

The final RBC rule establishes a different approach.  Unlike the current system, the final rule requires complex credit unions to calculate an RBC ratio.  The RBC ratio must, itself, exceed certain thresholds.  Most notably, for a complex credit union to be deemed “well capitalized,” its RBC ratio must exceed 10 percent.  Specifically, the final requires complex credit unions that otherwise qualify as “well capitalized” based on their net worth ratio to also satisfy this separate 10 percent RBC threshold in order to maintain a “well capitalized” classification.  As a result, under the final rule, a credit union that is otherwise “well capitalized” based on its net worth ratio could lose that designation if its RBC ratio falls between 8 percent and 9.99 percent, in which case it would be deemed “adequately capitalized.”  A comparable situation cannot occur under NCUA’s current capital adequacy rules.

Make sense? It’s tricky, I know.  So here’s a little treat for this trick—let's break it down through pictures.

Below is a picture of Part 702’s current framework- leverage ratio and RBNW.

As you can see, the current framework only requires a credit union to compares its RBNW requirement to one leverage ratio tier – the one between adequately and undercapitalized.  Specifically, a credit union would compare the leverage ratio requirement (6%) with the RBNW requirement and the higher of the two forms the governing standard.  Thus, the existing “one-tiered” RBNW only affects that first hurdle that a credit union faces to avoid being designated as undercapitalized.  As such, the RBNW requirement only comes into play when it exceeds 6%, which is not the case for the majority of credit unions.

Now compare it to a picture of how Part 702 will be structured in 2019—leverage ratio and RBC:

As you can see, under the final rule, RBNW goes away and is replaced by RBC, which has two tiers indicated by the dark and light blue bars. Therefore, the final rule requires a credit union to compare its RBC requirement with that of the leverage ratio for both tiers – the one between well and adequately capitalized and the one between adequately and undercapitalized. For most credit unions, this will not affect the lower standard, since it has generally been governed by the leverage ratio anyways. However, for many credit unions the standard for the well capitalized designation will increase as a result of this rule.

Phew!! Who needs candy? I think you all earned it after reading this blog post.  Have a happy and safe Halloween. When you get back from your weekends, please be sure to take a look at NAFCU’s Final Regulation 15-EF-15, our Capital Reform Issue Page, or reach out to me directly ([email protected], 703-842-2266) with any RBC questions.   

RBC: Nuts and Bolts, pt 1

Written by Alicia Nealon, Director of Regulatory Affairs

In case you didn’t see, the NCUA Board finalized its risk-based capital (RBC) rule last week with an effective date of January 1, 2019.  With that in mind, we are launching a series of posts where NAFCU’s Compliance Blog will break down different portions of the final rule in order to help our compliance colleagues learn the basic framework of NCUA’s new RBC requirements.  While your credit union’s CFO will likely be responsible for the nuts and bolts of RBC, NAFCU hopes that this series of blog posts will help the compliance community have a working knowledge of the rule’s overall structure and requirements. (this is my polite way of saying “don’t try this at home kids without accounting supervision”).

Today’s topic is the RBC ratio.  Under the final rule, a complex credit union determines its RBC ratio by calculating the percentage, rounded to two decimal places, of its RBC numerator to its total risk-weighted assets denominator. 

Let's start with the numerator.  The RBC ratio numerator is calculated by adding together a particular list of relatively tangible or liquid capital elements and subtracting other specified capital that is less tangible or liquid. In other words, capital that would be available to cover losses is added together, and then specified balance sheet items are subtracted to determine the capital ratio numerator.

Is your head spinning yet? As someone who has an aversion to accounting, I find charts exceptionally helpful.  Below is a chart illustrating the RBC numerator:

Turning now to the denominator, the RBC ratio denominator represents a credit union’s total risk-weighted assets which includes risk-weighted on-balance sheet assets, plus certain off-balance sheet assets, plus risk-weighted derivatives, and minus the items deducted from the RBC numerator. This is a complex and highly technical calculation involving ten categories of risk weights based on the particular risk posed by the asset to the credit union’s operations.  Because I can’t help myself,   Download Here a chart detailing the risk categories and the risk-weights assigned to each specifically defined on-balance sheet asset.

As your credit union is making its way through RBC, be sure to take a look at NAFCU’s Final Regulation 15-EF-15, our Capital Reform Issue Page, or reach out to me directly ([email protected], 703-842-2266) with your questions. 

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A Look at the Final Risk-Based Capital Rule

Free Live Webcast: Monday, October 26 | 3:30 p.m. – 5:00 p.m. EST

Deep dive into NCUA's final risk-based capital rule with Larry Fazio, NCUA’s Director of Examination and Insurance and architect of the final rule. This free webcast will provide a closer look at the final rule, and offer NCUA’s outlook for implementing this rule through its examination and supervision process in 2019. You'll also be able to ask questions of Fazio and NAFCU’s team. Click here to register. 

Final RBC and HMDA Rules Unveiled

Written by Alicia Nealon, Director of Regulatory Affairs

While NAFCU has long championed coordination amongst the financial regulators, yesterday was not quite what we had in mind. (Note to self, drop footnote in future comment letters defining coordination to not include publishing 1300+ pages of regulations within 45 minutes of each other).  Nevertheless, the CFPB and NCUA finalized two major rulemakings on Thursday- RBC and HMDA.  To start your Friday morning off the regulatory way, NAFCU is going to give you a high-level summary of both (and a high five for when you make it through both sets of rules).

RBC

After much anticipation, the NCUA Board finalized its risk-based capital (RBC) rule yesterday.  The rule amends the agency’s current regulations regarding prompt corrective action (PCA), makes the following key changes to Part 702:

• Replaces the current risk-based net worth (RBNW) ratio with a new risk-based capital (RBC) ratio for federally insured natural person credit unions with over $100 million in assets;
• Changes the definition of “complex credit union,” for the purposes of capital requirements, to include credit unions greater than $100 million in assets;
• Establishes a risk-based capital ratio of 10 percent for well-capitalized credit unions;
• Establishes a risk-based capital ratio of 8 percent for adequately-capitalized credit unions;
• Revises existing risk weights to reflect recent changes made by other banking regulators under the Basel System;
• Requires higher minimum levels of capital for  credit unions with concentrations of assets in real estate loans,  commercial loans or non-current loans; and
• Sets forth how NCUA, through its supervisory authority, can address a credit union that does not hold capital that is commensurate with its risk.

These changes are effective on January 1, 2019.

Since the NCUA Board initially proposed RBC in January 2014, NAFCU and our member credit unions have continually advocated for significant changes. This final rule includes the following key changes:

• Removes Individual Minimum Capital Requirement;
• Removes interest rate risk (IRR) from consideration in the RBC calculation;
• Raises the threshold for determining  “complex credit union,” for the purposes of capital requirements, from $50 million to $100 million in assets;
• Drops the 1.25 percent Allowance for Loan and Lease Losses (ALLL) cap from the risk-based capital ratio numerator;
• Revises a number of risk-weights, including those for Member Business Loans, CUSOs, corporate credit unions, real estate loans and investments; and
• Provides for an extended implementation period until January 1, 2019.
• Incorporates a “Non-Significant Equity Exposure” risk-weight of 100 percent for non-consolidated investments in CUSOs, perpetual paid in corporate capital, among other, when the total of equity      exposures is less than 10 percent of the credit union’s capital elements of the risk-based capital numerator;
• Adds a section for “Charitable Donation Accounts,” assigning it a risk weight of 100 percent;
• Clarifies that “excluded goodwill” and “excluded  other intangible assets” applies to mergers or combinations completed on or before 60 days after publication of the final rule in the Federal Register, and extending the  expiration of this definition to January 1, 2029.

NAFCU will be hosting a webcast on Monday October 26, 2015, with Larry Fazio, NCUA’s Director of Examination and Insurance and architect of the final rule.  This free webcast will provide a closer look at the final rule, and offer NCUA’s outlook for implementing this rule through its examination and supervision process in 2019.  

HMDA Final Rule

In other news, the Consumer Financial Protection Bureau (CFPB) released its final rule ushering in sweeping changes to Regulation C, which implements the Home Mortgage Disclosure Act (HMDA). Did you enjoy negotiating with your vendors during the TRID implementation? Good news, you get to do it again!

Although you can expect a more substantive blog post on the final rule in the near future, I wanted to highlight a few noteworthy changes to Regulation C:

• Transactional Coverage Test
  • The final rule requires credit unions to report HMDA data on all covered loans. A “covered loan” is defined as any closed-end mortgage loan or open-end line of credit, unless the transaction is specifically excluded under § 1003.3. As a result, reporting HELOC data is now mandatory.
• Institutional Coverage Test
  • The final rule maintains the current exclusions while adding a prong to the institutional coverage test. Assuming the institution does not fall into one of the current exclusions; the final rule adds a “minimum loan volume threshold” that requires lenders that “originated 25 closed-end mortgage loans or at least 100 open-end lines of credit in each of the two preceding calendar years” to report. Credit unions falling under these thresholds are exempt from reporting.
• Data Points
  • While the final rule adopts the majority of the proposed data points, four of the proposed data points were “dropped.” The eliminated data points include the QM flag, the initial draw on line of credit, the requirement to report the relevant MSA, and the risk adjusted pre-discounted interest rate.
• Quarterly Reporting
• The final rule also adopted a quarterly reporting requirement for institutions that report more than 60,000 covered loans in the previous calendar year. Institutions meeting these criteria will be required to submit their information in chunks over the course of the year, as opposed to an annual submission of all relevant data on a one-off basis. 

The majority of the final rule goes into effect January 1, 2018, and credit unions will begin recording the new data points after that date so that they may be reported to the Bureau in 2019. However, there are two exceptions to this general effective date. The new institutional coverage test will become effective on January 1, 2017, and the quarterly reporting requirement for large-volume filers will become effective on January 1, 2020. 

NAFCU Provides Talking Points for RBC2

Written by Alicia Nealon, Director of Regulatory Affairs

With just over a month before the April 27^th comment deadline for NCUA’s second risk based capital proposal (RBC2), NAFCU has put together Talking Points - a very helpful tool for our members to assist as you begin putting your comment letters together.

While NCUA addressed several key concerns raised by NAFCU, credit unions and lawmakers in this second proposal, including the risk weighting and implementation period, NAFCU still strongly believes this proposed rulemaking is unnecessary. The costs associated with it are shocking given how extremely well-capitalized the industry is today.

Simply put, the credit union industry does not need this rulemaking.  NAFCU believes RBC2 is an inappropriate use of credit union resources to address concerns about a few credit union outliers. The few-dozen credit unions NCUA says would be downgraded under the proposal would need to hold $53.6 million in capital — funds that might be used elsewhere for loans and services — to remain well-capitalized. We believe risk in credit union operations should be addressed on a case-by-case basis, and not with a broad-brush regulation.

As NCUA continues to evaluate RBC2, it is pivotal that the entire credit union industry weigh-in.  Your insight is valuable to the agency.  The thoughts and concerns you express will ultimately lead to better capital requirements for credit unions.

With that in mind, I encourage you to write a comment letter to NCUA explaining how RBC2 will affect your credit union, and the industry as a whole. To help, NAFCU has put together Talking Points for our members based on our analysis of the proposed rule.  While the Talking Points should be colored with the views and opinions of your credit union, NAFCU has listed a number of helpful arguments broken down by topic.  For example, the Talking Points detail NAFCU’s disagreement with NCUA’s interpretation of the Federal Credit Union Act to support RBC2’s two-tier RBC standard, as well as review many of RBC2’s proposed risk-weights.

NCUA needs to hear what credit unions are saying and keep capital in the marketplace instead of parked on your a balance sheets.  For our part, NAFCU is committed to doing whatever it takes — at NCUA and on the Hill — to ensure that a fair system of risk-based capital is established for credit unions.  For your part, I ask that you make your voices heard and submit a comment letter to the agency by the April 27, 2015, deadline letting NCUA know how this rulemaking is completely unnecessary. 

As you consider RBC2’s impact on your credit union, 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 ([email protected], 703-842-2266) with your thoughts. 

RBC2: A Penny for Your Thoughts, pt 3.

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 ([email protected], 703-842-2266) with your thoughts. 

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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.

RBC2: A Penny for Your Thoughts - Part 2; Privacy Webcast; Programming Note

Written by Alicia Nealon, Director of Regulatory Affairs

Welcome back to the second 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, or lack thereof, of Member Business Loans (MBLs).

A key change between this proposal and the original involves the treatment of Member Business Loans (MBLs).  The original RBC proposal would have assigned risk-weights based on a loan’s status as an MBL under Part 723’s general definition regardless of other underlying risk factors such as the type of collateral used to secure the loan. RBC2, however, would assign risk weights to “commercial loans” rather than “MBLs.”  Specifically, risk-weights for commercial loans under RBC2 would generally be determined by three factors: (1) the purpose of the loan; (2) the use of the proceeds of the loan; and (3) the type of underlying collateral. In other words, the revised proposal recognizes the reality that some business loans are riskier than others -- a move sought by NAFCU during the original proposal.

Under RBC2, the definition of “commercial loans” includes all commercial purpose loans regardless of dollar amount other than business purposes loans that meet the proposal’s definition of “residential real estate loan.” Generally this would exclude business loans:

• Secured by a first-lien on a one-to-four-family non-owner occupied dwelling (i.e. rental properties), and
• Secured by a vehicle generally manufactured for personal use, except for those used for fare paying or fleet purposes.

RBC2 would also assign a lower risk-weight to the portion of a commercial loan that is insured or guaranteed by the U.S. Government, U.S. Government agency or another public sector. Additionally, these loans would not count toward the proposal’s 50 percent asset concentration threshold. RBC2 would also assign a lower risk-weight to any amount of a contractual compensating balance (i.e. shares secured by the loan) associated with a commercial loan and on deposit in the credit union. These commercial loans also would not count such amounts toward the 50 percent asset concentration threshold.

Is your head spinning yet? As someone who has an aversion for numbers, I find charts exceptionally helpful.  Below is a chart illustrating RBC2’s treatment of commercial loans by risk-weight.

20% Risk Weight	100% Risk Weight	150% Risk Weight
The exposure amount of commercial loans secured with contractual compensating balances	The outstanding balance  (minus the portion if any with a government guarantee) of current commercial loans, minus contractual compensating balances that comprise less than 50% of   assets	Current commercial loans (minus contractual compensating balances) comprising over 50% of assets
		Non-current commercial loans (minus contractual compensating balances)

Under RBC2, business loans secured by a first-lien on a one-to-four-family non-owner occupied dwelling, which are treated as MBLs under Part 723, would be categorized and risk weighted as a residential real estate loan rather than a commercial loan. NCUA estimates that a significant amount of MBLs are business loans secured by a first-lien on a one-to-four-family non-owner, and thus would receive the lower, applicable residential real estate risk-weight. 

It is important to note that RBC2 would not change Part 723’s definition of MBLs for purposes of complying with the statutory cap.  Instead, RBC2 seeks to utilize a more relevant definition of commercial loans for purposes of risk weighting to better reflect underlying risk factors. Credit unions must still comply with the statutory limitation on MBLs and all applicable sections of Part 723.

What does everyone think? Does your credit union believe the revised definition of commercial loan better captures the loans made for a commercial purpose that have similar risk characteristics? Does your credit union think the risk-weights are appropriately weighted for the risk involved for assets outlined in the chart above?

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 ([email protected], 703-842-2266) with your thoughts. 

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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.

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Programming Note. NAFCU's office will close at noon today and will also be closed on Monday for Presidents' Day weekend. We will be back to blogging on Wednesday. Have a great weekend!  

RBC2: A Penny for Your Thoughts

 Written by Alicia Nealon, Director of Regulatory Affairs

In case you didn’t see, RBC2 was published in Federal Register last week, and the comment deadline has been set for April 27^th.  With that in mind, we are launching a series of posts where NAFCU’s Compliance Blog will break down different portions of the proposal and highlight the key issues that we are looking for your feedback on.  Today’s topic is the proposed definition of “complex credit union.”

RBC2 would, among other things, change the definition of “complex credit union,” for the purposes of NCUA’s capital requirements.  The Federal Credit Union Act directs NCUA to base its definition of ‘‘complex’’ credit unions ‘‘on the portfolios of assets and liabilities of credit unions.’’  Under the current rule, credit unions are ‘‘complex’’ and subject to the risk-based net worth requirement only if they have quarter-end total assets over $50 million and they have a risk based net worth requirement exceeding 6%.  RBC2, however, would define the term ‘‘complex’’ credit union using a single asset size threshold of $100 million as a proxy for a credit union’s complexity.  In other words, RBC2 would establish a bright-line $100 million asset threshold to determine whether a credit union is complex for the purposes of NCUA’s capital requirements.

What does everyone think? Does your credit union agree that a bright line asset threshold of $100 million is an appropriate method of defining “complex credit union?” Or does your credit union believe the definition of “complex” should actually consider a credit union’s portfolios of assets and liabilities? In others words, would your credit union rather a bright-line asset threshold, or a review of the products and activities that your engaged in?

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 ([email protected], 703-842-2266) with your thoughts. 

Interest Rate Risk Now and a Look Ahead

Written by JiJi Bahhur, Director of Regulatory Compliance

Although there hasn’t been any new guidance or final ruling on interest rate risk (IRR) as of late, it has been one of the National Credit Union Administration’s (NCUA’s) focuses for the past two years.  Because it is on NCUA’s radar, I’d like to highlight the following today:

• NCUA’s 2015 Supervisory Focus on IRR;
• NCUA’s IRR Rule and Guidance that is currently available;
• What may come in the near future on IRR; and
• A call to you to share your credit union’s recent experiences with IRR.

Supervisory Focus

Like 2014, interest rate risk (IRR) remains high on NCUA’s list of supervisory priorities for 2015.  While most credit unions have managed through interest rate hikes in the past, according to NCUA some credit unions "may not be as well positioned this year due to higher concentrations of net long-term assets and unrealized losses."  Thus, in 2015, NCUA examiners will continue to use existing guidance to assess credit unions' interest rate risk exposure. NCUA Letter to Credit Unions 15-CU-01 also mentions that the agency is in the process of updating this guidance to ensure that IRR is assessed accurately and that the appropriate supervisory steps are taken in response to excessive IRR exposure. 

In addition, compliance with NCUA’s Interest Rate Risk Rule (12 C.F.R. § 741.3(b)(5)) will be assessed by examiners as well. 

Current Rule(s) and Guidance on IRR

Section 741.3(b)(5) of NCUA’s regulation requires credit unions with assets over $50 million, as measured by the most recent Call Report filing, to draft and implement a written IRR policy and develop a program to identify, measure, monitor and control IRR.  Appendix B to Part 741 provides detailed guidance on how to develop an IRR policy and an effective IRR program, including best practices for managing IRR.  Given the differences among credit unions (e.g., operations, complexity, risk exposure, size), each credit union should use the guidance in Appendix B to formulate a policy that embodies its own practices, metrics and benchmarks appropriate to its operations. Further, the credit union's board of directors is responsible for ensuring the IRR policy is adequate, which includes a periodic review of the credit union's IRR exposure and compliance with the policy and risk limits.

Some additional NCUA guidance is listed below:

• NCUA Letter to Credit Unions 12-CU-05, "Interest Rate Risk Policy and Program Requirements;"
• NCUA Letter to Credit Unions 12-CU-11, "Interest Rate Risk Policy and Program Frequently Asked Questions;" and
• NCUA Letter to Credit Unions 10-CU-06, "Interagency Advisory on Interest Rate Risk Management."

NCUA’s IRR guidance and rule requirements are also posted on its Interest Rate Risk Resources webpage.

The Future of IRR

With the release of the second risk-based capital proposal (RBC2), the revised proposal made a number of changes from the original 2014 RBC proposal, including the removal of interest rate risk.  Therefore, in addition to updating existing guidance on IRR, NCUA has also stated that it intends to promulgate a separate rulemaking on IRR in the future.  The agency indicated, however, that it does not intend to issue an IRR proposal until sometime after the RBC2 comment period closes.

For more information on the RBC2 proposal, follow our RBC blog series here.  Also, NAFCU’s Regulatory Affairs team has provided a Regulatory Alert to further assist with the proposed requirements of RBC2.

Call to Share Experiences

NAFCU would like to hear from you.  Given that IRR has been one of NCUA’s top supervisory focuses for the past two years, I’m sure many of you have experiences with IRR.  The agency’s attention to IRR has also been one of NAFCU’s top priorities as well, but to be true advocates for our members, we need your feedback and perspectives.  Please send your input to NAFCU’s Director of Regulatory Affairs, Alicia Nealon, at [email protected]. 

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Weekend Fun.  On a lighter note, I just had to share the newest pictures of the kids on a playdate with their cousin.  Nothing like some chicken nuggets, cartoons, and toys!

Just How Costly Will RBC2 Really Be?!?

Written by Alicia Nealon, Director of Regulatory Affairs

Happy Friday Compliance Community! When NAFCU’s Compliance Team graciously lets me borrow the blog, I usually try to share happy news- especially on Fridays. Sadly, I am not going to deliver anything joyous today.  Instead, I need to let the credit union industry know about the astronomical costs of NCUA’s proposed two-tiered approach to risk-based capital (RBC).

As we blogged about last Friday, the NCUA Board issued a revised RBC proposal, or RBC2, during its January 15^th opening Board meeting. The proposed rule would amend Part 702 of NCUA’s capital adequacy regulations to, among other things, establish RBC requirements for “complex” federally insured credit unions.  For some further reading and analysis on the proposal, take a look at NAFCU’s Regulatory Alert 15-EA-02, NAFCU's RBC calculator, and our Capital Reform Issue Page.

Simply put- RBC2 will cost the credit union industry hundreds of millions of dollars.  NCUA’s claim that only a limited number of credit unions will be downgraded ignores the fact that most credit unions maintain a capital cushion above the minimum needed to avoid prompt corrective action (PCA) – a practice often strongly encouraged by NCUA’s own examiners.  Despite NCUA’s projections, this proposal would force credit unions to hold hundreds of millions of dollars in additional reserves to achieve the same capital cushion levels that they currently maintain. 

Based on our financial analysis, credit unions’ capital cushions will suffer a $490 million hit if NCUA promulgates a two-tier approach to RBC.  Specifically, in order to satisfy the proposal’s “well-capitalized” thresholds, today’s credit unions would need to raise an additional $760 million.  On the other hand, to satisfy the proposal’s “adequately capitalized” thresholds, today’s credit unions would need to raise an additional $270 million.

So what does this all mean? Essentially, if NCUA were to promulgate a single-tier approach and only establish an RBC ratio for “adequately capitalized,” today’s credit unions would need to raise an additional $270 million in order to maintain their current capital levels.  However, because NCUA is proposing a two-tier approach, credit unions will need to raise an additional $760 million to achieve their current capital levels.  That means the proposed two-tier system could cost nearly half a billion more than a one-tier system.

NAFCU believes these shocking costs clearly demonstrate that the proposal misclassifies safe, sound credit unions and imposes the unnecessary burden on them to raise additional capital in order to maintain their current capital buffers or to avoid PCA.

NAFCU continues to challenge the agency’s legal authority to implement this two-tiered system, which based on these figures would clearly hinder credit unions’ viability and prosperity.  We strongly believe this proposal is costly and unnecessary for an industry that is already extremely well-capitalized.

Again, for more information on other aspects of the nearly 500-page proposal, be sure to check out NAFCU’s Regulatory Alert.  We are also accepting feedback from our members for our comment letter through our Regulatory Alert Survey.

NCUA Unveils RBC2

Written by Alicia Nealon, Director of Regulatory Affairs

After much anticipation, the NCUA Board issued a revised risk-based capital (RBC) proposal during yesterday’s opening Board meeting.  Given its nearly 500 page length, it’s no surprise that the proposal would make several changes to the agency’s current capital requirements.

Out for a 90-day comment period, the proposal retains some elements of last year’s RBC proposal.  Most notably, the revised proposal would still establish different risk-based capital thresholds for “well-capitalized” and “adequately capitalized” credit unions.  NCUA’s legal authority to promulgate these differing thresholds was a point of heated debate amongst the NCUA Board Members yesterday. 

Here are some of the key changes that the proposal would make to the agency’s current capital requirements:

• Establish a new RBC ratio for federally insured natural person credit unions with over $100 million in assets;
• Changes the definition of “complex credit union,” for the purposes of capital requirements, to include credit unions greater than $100 million in assets;
• Establish a risk-based capital ratio of 10 percent for well-capitalized credit unions;
• Establish a risk-based capital ratio of 8 percent for adequately-capitalized credit unions;
• Revise existing risk weights to reflect recent changes made by other banking regulators under the Basel System;
• Require higher minimum levels of capital for credit unions with concentrations of assets in real estate loans, commercial loans or non-current loans; and
• Set forth how NCUA, through its supervisory authority, can address a credit union that does not hold capital that is commensurate with its risk.

If finalized, these changes would be effective on January 1, 2019.

This revised proposal makes a number of changes from the original 2014 RBC proposal.  Most notably, it:

• Removes individual minimum capital requirements (IMCR);
• Removes interest rate risk (IRR);
• Raises the threshold for determining  “complex credit union,” for the purposes of capital requirements, from $50 million to $100 million in assets;
• Drops the 1.25% Allowance for Loan and Lease Losses (ALLL) cap from the risk-based capital ratio numerator;
• Revises a number of risk-weights, including those for Member Business Loans, CUSOs, corporate credit unions, real estate loans and investments; and
• Provides a longer implementation period.

A noteworthy aspect of the revised RBC proposal is the reduced impact on credit union capital buffers.  Simply looking at the number of credit unions downgraded by the RBC proposal ignores the fact that many more credit unions, while not downgraded, will be required to hold more capital in order to maintain their current capital buffers.  According to NCUA, the removal of Interest Rate Risk and the 1.25% ALLL cap from the risk-based capital ratio numerator will reduce the impact on credit union’s capital cushions.   As a result, the average credit union will not need to hold as much additional capital as the original 2014 proposal would have required in order to maintain its current capital buffer.  NAFCU’s Research Division is in the process of updating our Risk-Based Calculator so our members can thoroughly assess the impact of this proposal on their institutions’ capital requirements.

NCUA has also posted various revised proposal summary documents on its website. These include a two-page risk weight comparison sheet that details the current effective risk weights, the original proposal, the revised proposal and the Federal Deposit Insurance Corporation’s (FDIC’s) equivalent for banks. The documents will also show where the revised proposals match those for banks.  All these documents are also listed in the "Additional Information & Resources" section of NAFCU’s Capital Reform page.

A report on yesterday’s NCUA Board meeting is posted on NAFCU’s website.  NAFCU is also sharing our initial analysis in a special video update from NAFCU’s Senior Vice President of Government Affairs and General Counsel Carrie Hunt- available on our website today.  Additionally, NAFCU staff is diligently reviewing the proposal to prepare more detailed analysis, including a Regulatory Alert and a webcast……Stay tuned!!! 

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NAFCU’s Regulatory Compliance School – Enroll and reserve your seat today! You still have time to save $100 with promo code SCHOOLSAVINGS. Hurry as this offer ends January 23, 2015.

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Programming Note. NAFCU's office will close at noon today and will also be closed on Monday in honor of Martin Luther King Day. We will be back to blogging on Wednesday.

NCUA Allows for Second Comment Period for Risk-Based Capital Rule

Written by Angela Meyster, Senior Regulatory Affairs Counsel

A sigh of relief was heard throughout the credit union industry last Monday when NCUA announced that it will propose a revised Risk-Based Capital Rule for a new comment period.  NCUA Board Chairman Matz stated that this second comment period was appropriate as a result of the “significant structural changes being considered” and that she was always considering another comment period in the event that the intended changes to the proposal exceeded the parameters of the Administrative Procedures Act.

Details of what the second proposal will entail are scarce, but NCUA has indicated that the amended proposal will include, among other changes, (1) a longer implementation period and (2) revised risk weights for: mortgages, investments, member business loans, credit union service organizations, and corporate credit unions,.  Additionally, NCUA will seek comment on an “alternative approach for addressing interest rate risk using the supervisory process.”

Only time will tell how significant these proposed structural changes really are, but it does not look like credit unions will have to wait too long—Chairman Matz has noted that she anticipates that the NCUA Board could reissue a revised proposal by the end of 2014!

Now, Chairman Matz is not the only NCUA Board member that has been vocal on this rule. NCUA Board Vice Chairman Rick Metsger praised Chairman Matz’s willingness to consider structural changes in the risk-based capital proposed rule.  Beyond the additional time to comment, Vice Chairman Metsger is in favor of a proposal that would separate interest rate risk and credit risk. He stated:

“As I have often said, I believe interest rate risk is important and must be addressed in the risk-based capital rule, but it should be addressed separately from credit risk. Weighting credit risk and interest rate risk with a single numerical value created conflicts that ultimately made it difficult to accurately weigh the risk of either.

I am pleased we appear to be moving in the direction of separating interest rate risk and credit risk and that structural change alone is sufficient for me to believe an additional comment period would be appropriate.

While an amended proposed rule has not been drafted, I believe that when people do review it, they will conclude that we have both listened to—and heard—the comments that were submitted during the initial comment period. Those who weighed in thoughtfully on the original proposal will see the agency has been responsive to fact-based analysis.”

New NCUA Board Member Mark McWatters has been adamant since joining the NCUA Board that he would not vote for the risk-based capital rule without a second comment period.  Following Chairman Matz’s statement, Board member McWatters stated:

 “I will not consider the rules for adoption unless they are re-proposed with a robust comment period of not less than 60 to 90 days. I articulated this position out of respect for Congress and those members of the credit union community who have  enthusiastically voiced their opposition to the proposed rules.

That said, the previously proposed risk-based capital rules are deeply flawed and merit substantial revision.  The devil is in the details, and I await the details before I can pass judgment on the next draft of the proposed rules.” 

The devil is indeed in the details

I cannot tell you how short-lived the sense of peace from this announcement will be and whether the industry’s original concerns will be reflected in the new proposal. That said, this recent action should be taken as a win for the credit union industry.  Credit unions, large and small and with very diverse fields of membership, banded together and effected change from the regulator and this news is a good indication that the regulator is actually listening to credit union concerns.  NAFCU has consistently advocated for a second comment period and we are pleased NCUA has paid heed to the comments and feedback of credit unions across the country and is planning to make significant changes to the structure of the rule. 

Looking for a refresher on the issue to prepare for the suspense during next three NCUA Board meetings? Visit NAFCU’s Capital Reform page. On it you will find a summary of what has happened to date with regards to the proposed rule, past compliance blogs outlining the issues, a recording of the NCUA’s listening sessions that occurred this past summer, NAFCU’s official comment letter to NCUA and position statement on the rule, recent media outreach, and much more.

On behalf of all of NAFCU, I would like to thank all of you for the work your credit union has done on this important issue.  As for the Regulatory Affairs team, we will continue to do whatever it takes to end up with a fair rule, and we will continue to update you on any and all developments.

Risk-Based Capital: Thank You

Written by Michael Coleman, Director of Regulatory Affairs

Thank you. There is no doubt that NCUA’s proposed rule on risk-based capital is the most significant rule that NCUA has issued in recent history. The entire credit union industry has come out in force to express their concerns about this proposal. 

So we would like to say thank you to all of our members, and other industry stakeholders, who have submitted more than 1100 comment letters in response to NCUA’s proposed rule on risk-based capital. Thank you because your comments are already making a difference. Chairman Matz has said that NCUA will take into consideration all of the comments NCUA receives as they evaluate making changes to the proposal (such as to the risk-weighting of MBLs). Check out her article in the May edition of the NCUA Report. Also, Chairman Matz has stated in the press that they are listening to the comments and feedback that they hear from credit unions on the proposal (including the implementation timeframe), check out this article, this article and this article. If the NCUA makes significant changes to the proposed rule it will be due to your efforts, so again, thank you!

NAFCU filed our letter yesterday. You can check it out here, you can also find it on NAFCU’s capital reform issue page. It’s more than 30 pages long, but there are a couple of things we would like to highlight. First, a number of the NCUA proposed risk-weights (such as those for real estate, investments and MBLs) would require credit unions to hold much more capital as compared with  the FDIC and Basel III requirements for community banks ─ often without solid justification for the deviations. If finalized as proposed, these risk weights would ultimately result in a competitive disadvantage for credit unions. NAFCU argued in our comment letter that NCUA should change those risk-weights to be consistent with the risk-weighting given to those assets by the FDIC.

NAFCU has a number of concerns with the proposed rule as detailed in our letter. However, our major concerns include:

• Several issues related to NCUA’s legal authority to issue the rule as proposed, such as:The need for a legislative solution in order to achieve a fair and balanced risk-based capital system;
  • Comparability with banking regulatory requirements;
  • Substitution of statutorily defined legal terms;
  • Individual minimum capital requirements;
  • Definition of a “complex” credit union;
• NCUA’s treatment of the regulatory process including the refusal to extend the comment period and form an industry working group prior to releasing a proposed rule, and the need for an additional notice of proposed rulemaking with public comment period;
• NCUA’s drastic understatement of credit unions that will be affected by this rule and whose balance sheets and business plans will need adjustment;
• NCUA’s proposed risk-based capital ratio for well capitalized credit unions set at 10.5 percent;
• NCUA’s treatment of risk-weighted assets and the lack of explanation for deviation from similar banking risk-weights;
• NCUA’s incorporation of interest rate and concentration risk into risk-weighting for real estate, investments, and member business loans (MBL’s);
• Individual minimum capital requirements for credit unions including issues with the subjectivity of their imposition;
• Components not included in the numerator portion of the risk-based capital ratio, such as goodwill;
• The 1.25 percent cap on Allowance for Loan and Lease Losses (ALLL) especially considering the Financial Accounting Standards Board’s (FASB) most recent proposal on ALLL;
• Supplemental capital authority is needed now more than ever considering the restrictions brought on by this rule; and
• The proposed 18-month implementation timetable is not long enough for a rule as complex and impactful as this proposed rule.

So what happens next? NCUA is hosting three listening sessions where Chairman Matz and Board Member Metsger will be seeking feedback on the rule from members of the credit union industry and they are open to the public. The catch is you need to register. You can do so here. The first is on June 26th in Los Angeles, CA. The second is on July 10th in Chicago, IL. The third and final one is in Alexandria, VA on July 17th. This is a great opportunity to get your voice heard and speak directly to NCUA Chairman Matz about how this rule impacts you and your credit union. Hearing from credit unions directly is the most powerful message.

Remember that this rule as proposed will create a competitive disadvantage for credit unions and your voice can help to change that. Thank you for all of your comments to NCUA and your efforts to change this important proposed rule. As a reminder, this is the last day to submit comment letters to NCUA, so be sure to get your letters in if they aren’t in already. Comment letters should be addressed to Mr. Gerard Poliquin, Secretary to the NCUA Board, 1775 Duke Street, Alexandria, VA  22314. They can be emailed to [email protected]. Be sure to include "[Your credit unions name] - Comments on Proposed Rule: PCA - Risk-Based Capital" in the e-mail subject line. Again, thank you! 

Four Things To Get Off Your Plate Before The End of May: Free Consulting, Second Round of NCUA Grants, and Risk Based Capital Rule and Remittances Comment Deadline

By Eliott C. Ponte, Law Clerk

Free Consulting from the NCUA

Credit unions that have either (1) total assets of less than $50 million, (2) a new charter (fewer than 10 years), (3) a designation as a Minority Depository Institution, or (4) a designation as a low-income credit union can nominate themselves to receive free consulting services from the National Credit Union Administration’s Office of Small Credit Union Initiatives.  

NCUA’s consulting services are provided by experienced economic development specialists who offer assistance to credit unions in the areas of budgeting, marketing, policy development, strategic planning and operational or regulatory areas.  Selected credit unions receive assistance for a six-month period.  Credit unions must nominate themselves by May 31, 2014.  For additional information, please visit the consulting page for the Office of Small Credit Union Initiatives  or email the Office of Small Credit Union Initiatives at [email protected].

 

Second Round for Grants:  $1.2 Million Available

NCUA will accept applications from June 2^nd through June 30^th for grants in various areas.  The guidelines for the Second Round of Grants can be found here.  To qualify for this grant program, federally chartered credit unions must have a current “low-income” designation, and state chartered credit unions must have the equivalent low-designation from their respective state supervisory authority and concurrence from the NCUA. 

The NCUA is offering four separate initiatives during the second round of funding.  Each credit union may apply in any of the four grant initiatives, but the credit union may only receive funding for one initiative.  Below is a list of the four initiatives:

• Community Development Financial Institution Certification.  NCUA anticipates awarding 60 credit unions $2,500 each to cover the cost of applying for Community Development Financial Institution certification.  This certification makes a credit union eligible for funding to help service low-income members and communities that lack adequate access to affordable financial services products.
• New Product and Service Development.  Credit unions that want to offer members new electronic services will be eligible for grants up to a preset amount based on the individual product.  These services include first-time websites, home banking, mobile banking, bill pay, remote deposit capture, online loan and member applications, electronic or digital signatures, and debit, credit or prepaid cards.  Total allocation is $652,000, with a maximum award of $7,500 for each successful applicant.
• Collaboration.  NCUA will award four collaboration grants of up to $50,000 each for a total of $200,000.  Credit unions may use these grants to establish collaborative relationships for cost-saving projects like back-office operations, vendor due diligence and secondary capital investment pools.  A minimum of three credit unions must apply, with the lead credit union having its low-income designation.  Collaborations may include leagues, CUSOs or vendors.
• Training.  Grants of up to $3,000 each will be available to pay for training in compliance, collections and lending, and governance.  The total allocation for training grants is $198,000.

Credit unions can find more information and apply online by clicking here. 

 

NCUA Goes To YouTube to Explain Their Proposed Risk Based Capital Rule; Comment Deadline Approaching; Sign Up to Learn More on RBC at NAFCU’s Annual Conference

Last week, NCUA’s Larry Fazio, Director of Examination and Insurance, JeanMarie Komyathy, Director of Risk Management, and John Worth, Chief Economist, went to YouTube to discuss NCUA’s Proposed Risk Based Capital Rule (RBC Rule).  A link to their video can be found here.

During the video, the three explained that the reason for updating the RBC Rule was to adapt its capital rules with Basel II and III, to follow the FDIC’s amendments to its RBC Rules, and to respond to recommendations made by the Government Accountability Office and the NCUA’s Inspector General. 

In addition, the three stated that they expect about 200 credit unions will be negatively affected by the proposed RBC rule.  Specifically, about 190 credit unions will have their PCA category changed from well-capitalized institution to an adequately capitalized institution, and about 10 credit unions will drop to an undercapitalized institution.

For an in-depth summary of the NCUA’s proposed RBC rule, please read NAFCU’s Risk-Based Capital Rule Regulatory Alert.  Comments on the proposed rule are being accepted by the NCUA until May 28, 2014, and can be submitted by sending an email to [email protected].  NAFUC has put together speaking points on the RBC Rule and has outline its full position on its Risk Based Capital webpage.  In addition, this Compliance Blog has featured several posts on the RBC Rule.

NAFCU will also be discussing the NCUA’s RBC rule at NAFCU’s Annual Conference.  Register by May 23^rd and save $100!  For more information about NAFCU’s Annual Conference, held at the Venetian Hotel in Las Vegas from July 22^nd to 26^th, click here. 

 

Ten More Days of Comments:  CFPB Budges on Remittance Rule Comment Deadline

Last week, the CFPB announced that it would extend the comment period for the proposed amendments to its international remittance transfer rule by 10 days.  Originally, the CFPB only allowed a 30-day comment period that would have ended on May 27^th; however, NAFCU and other trade organizations urged the CFPB to extend the deadline to allow credit unions more time to prepare comments on the proposed rule. 

Currently, the rule proposes to extend an exception for international remittance transfers disclosures provided to federally insured credit unions and banks on certain international remittance transfers to July 21, 2020 (five more years).  In addition, the rule includes clarifications on a number of issues, including the treatment of U.S. military installations abroad, permissibility of oral disclosures, treatment of transfers from non-consumer accounts, and error resolution procedures and remedies.  A copy of the proposed rule can be found on the federal register, and an in-depth summary of the rule and an analysis of the issues can be found on NAFCU’s website.

Talking Points for Risk-Based Capital Proposed Rule Comment Letter; NAFCU Webcast on What Policies Must be Board-Approved

Written by PJ Hoffman, Regulatory Affairs Counsel

Welcome back to the latest installment of our recurring series of posts where NAFCU’s Compliance Blog discusses NCUA’s proposed rule regarding risk-based capital and provides you with resources to help your credit union understand the impact of the rule. Today’s topic is our newest resource for your credit union: NAFCU’s talking points for your comment letters to NCUA.

Some quick background, on January 23, 2014, the NCUA Board issued a proposed rule regarding risk-based capital for credit unions. We at NAFCU are working around the clock for you and have created some helpful resources for our members to use including NAFCU’s Regulatory Alert 14-EA-03, NAFCU Compliance Blog Posts here, here, here, here, NAFCU’s risk-based net-worth calculator, and the Capital Reform Issue Page.

This is a very important issue for the credit union industry and it is important that your credit union weighs in on the rule’s possible effects with the NCUA. Getting your voice heard is simple and here are four things your credit union should do right now. First, send us your comments here regarding the rule so that we can incorporate them into our advocacy and comment letter.  We have extended the deadline from April 1, 2014 to April 15, 2014 so get those comments in.

Secondly, your credit union should write a comment letter to NCUA explaining how the rule will affect your credit union and the industry as a whole. We have put together a very helpful tool for our members to help with putting your comment letters together. NAFCU’s talking points for comment letters are based on NAFCU’s analysis of the proposed rule that your credit union can use when formulating your comment letters to NCUA. The talking points should be colored with the views and opinions of your credit union, but there are a number of helpful arguments available that are broken down by topic. Remember comment letters are due to NCUA by May 28, 2014.

Third, check out our upcoming webcast on April 10, 2014 entitled “Risk-Based Capital Rule: How NCUA’s Proposal Will Impact You.”  It will break down the issues with the rule and its impact on your credit union with special guest speaker Denise Boutross McGlone from Affinity FCU. Be sure to tune in for an overview of the proposed rule as well as the impact it could have on your credit union’s operations now and in the future.

Finally, consider sending someone from your credit union to one of NCUA Chairman Matz’s listening sessions. NCUA has opened registration for its three listening sessions in Los Angeles, Chicago and Alexandria, Va., this summer, before a final capital rule is issued. These are free events but participation in each is limited to the first 150 people registering. Both NCUA Chairman Debbie Matz and Board Member Rick Metsger will attend the sessions and this is a great opportunity to follow up on your comment letters and talk directly with two members of the NCUA Board.

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Webcast: NCUA Board of Director Policies: Which Ones Truly Require Action?

Lighten your compliance burden! Andy Keeney will discuss how you can significantly reduce the attention you give to 35 of NCUA’s “required” Board of Director policies. You’ll also learn the remaining 15 policies your Board must absolutely act upon.

NAFCU’s Risk-Based Net-Worth Ratio Calculator; Shameless Plug for Member Call In

Written by PJ Hoffman, Regulatory Affairs Counsel

Welcome back to the latest installment of our recurring series of posts where NAFCU’s Compliance Blog will break down different portions of NCUA’s proposed rule regarding risk-based capital and provide you with resources to help your credit union understand the impact of the rule. Today’s topic is our newest resource for your credit union, NAFCU's risk-based net-worth calculator.  

To get you up to speed, on January 23, 2014, the NCUA Board issued a proposed rule regarding risk-based capital for credit unions. We at NAFCU are working tirelessly for you and have created some helpful resources for our members to use including NAFCU’s Regulatory Alert 14-EA-03, NAFCU Compliance Blog Posts here, here, here and the Capital Reform Issue Page. We know that this is an important issue and NAFCU has and will continue to advocate on behalf of our members regarding this rule, but your feedback is needed. Please send us your comments here regarding the rule so that we can incorporate them into our advocacy and comment letter.  

In order to help with understanding the impact of NCUA’s proposed rule on your credit union now and in the future, we have put together a customizable risk-based net-worth calculator for your credit union to use. This resource will allow you to substitute what you think the proposed risk weights should be and test the impact on your credit union's risk-based net worth ratio now and after five years. You can also change assumptions about your credit union’s asset growth and ROA and see the effect on your credit union's risk-based net worth ratio. All you need to do is plug in the information from the call report and you have a fully customizable calculator.  

You can use this tool to help your credit union in a number of ways. The calculator can be used to see how small changes to your portfolio can affect your credit union’s risk-based net-worth ratio both now and over the next 5 years.  The calculator is also helpful when your credit union is starting to write your comment letter to the NCUA regarding the proposed rule. Your credit union can use it to better understand the effects that the proposed risk-weights will have based on your portfolio especially when looking at heavily weighted assets such as investments and real estate loans. 

After you see how the proposed rule will affect your credit union, send us your comments here. We are especially interested in how the risk weights for real estate and investments will affect your decision making. Let us know.  

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Shameless Plug: NAFCU has a member call-in scheduled for Tuesday, March 18 at 4:00 pm Eastern and you should join us. 

NAFCU’s member-only call-in, will address the latest legislative, regulatory, compliance and economic issues affecting credit unions. NAFCU President and CEO Dan Berger and other NAFCU senior staff will discuss top challenges, including the Target breach and data security concerns, NCUA’s risk-based capital proposal and more. 

Participation is free for all members, but you must register to attend.

Risk-Based Capital: Risk Weights; Shameless Plug

Written by PJ Hoffman, Regulatory Affairs Counsel

Welcome back to the second installment of our recurring series of posts where NAFCU’s Compliance Blog will break down different portions of NCUA’s proposed rule regarding risk-based capital and give a more detailed analysis and explanation. Today’s topic is Risk Weights.

For some background, on January 23, 2014, the NCUA Board issued a proposed rule regarding risk-based capital for credit unions. We at NAFCU have created some helpful resources for our members to use including NAFCU Regulatory Alert 14-EA-03, NAFCU Compliance Blog Posts here and here, and the Capital Reform Issue Page. We know that this is an important issue and NAFCU has and will continue to advocate on behalf of our members regarding this rule, but your feedback is needed. Please send us your comments here regarding the rule so that we can incorporate them into our advocacy and comment letter.

Now back to those pesky risk weights. The proposed rule revises the risk-weights for many of NCUA’s current asset classifications and requires higher minimum levels of capital for credit unions with more risky portfolios. See the chart on page 15 of our Regulatory Alert 14-EA-03. As you will see, the NCUA designed their proposed risk weights to take into consideration concentration risk and interest rate risk.

As you look at the assets and their associate risk weights, you’ll see that some assets are weighted differently depending on the percentage of the type of asset that is in a credit union’s portfolio. This is done to compensate for concentration risk and can be seen with real estate loans, member business loans, and higher levels of delinquent loans. For example, non-delinquent 1^st mortgage real estate loans start at 50 percent risk weight for those less than 25% of a credit union’s assets then jump to 75 percent from 25-35% of assets and finally go all the way to 100 percent for those that comprise more than 35% of the assets of the credit union’s portfolio.

The proposed rule also uses the risk weights to compensate for interest rate risk with the investment risk weights. An example of this is the difference in proposed risk weights for investments based on the maturity levels of those investments. For investments with a maturity of 0-1 years the proposed risk weight is 20 percent. For those with 1-3 year maturities the proposed risk weight is 50 percent. It jumps again to 75 percent for those with 3-5 year maturities and up to 150 percent for investments with maturities from 5-10 years. If your credit union is has an investment with an investment with a maturity over 10 years, under the proposed rule, it will have a 200 percent risk weight!

These risk weights were not chosen at random. There was thought behind many of them. Unfortunately, NCUA did not include much of their analysis in the text of the proposed rule. As NAFCU has stated in a recent letter to Chairman Matz, we question whether the risk weighting proposed actually matches real risk in the system. The proposed rule assigns rigid risk-weights to many investments that when properly examined represent much less risk than the assigned risk-weights. Capital requirements should not be substitute for proper credit union management or appropriate examinations.

Tell us what you think. Which risk-weights did NCUA get right and which ones do they need to change?

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Shameless Plug

NAFCU has some great webcasts still available in the month of March that you won’t want to miss. 

Webcast: What Credit Unions Need to Know Now About NCUA’s New CUSO Rule

If you’ve made or plan to make an investment in a CUSO, new NCUA regulations will affect you in June. Get ready now. Understand the new CUSO direct reporting requirements and their implications. Register by Mar. 19 to save $100.

Webcast: The Target Data Breach: Next Steps for Protecting Your Members

Learn more about the breach, the claims filed against the retailer, and the issues surrounding what you should do next after a breach.  You’ll also receive insights from other major data breach cases to help your credit union decide whether or not to join the claim against Target. Register by Mar. 20 to save $100.

Risk-Based Capital: Individual Minimum Capital Requirements

Written by PJ Hoffman, Regulatory Affairs Counsel

Risk-Based Capital. As I am sure you have seen by now, on January 23, 2014, the NCUA Board issued a proposed rule regarding risk-based capital for credit unions. Without a doubt, risk-based capital is at the forefront of the mind of every credit union’s board, CEO, senior management, and compliance officers. The potential impact of this proposed rule cannot be understated. NAFCU has and will continue to advocate on behalf of our members regarding this rule.

With that in mind, we are launching a recurring series of posts where NAFCU’s Compliance Blog will break down different portions of NCUA’s proposed rule regarding risk-based capital and give a more detailed analysis and explanation than we have in our Regulatory Alert.  Today’s topic is Individual Minimum Capital Requirements.

The proposed rule includes a provision in proposed § 703.105 where NCUA may require a higher minimum risk-based capital ratio for an individual credit union in any case where the circumstances, such as the level of risk of a particular investment portfolio, the risk management systems, or other information, indicate that a higher minimum risk-based capital requirement is appropriate. This means that NCUA may establish increased individual minimum capital requirements upon its determination that the credit union’s capital is or may become inadequate in light of the credit union’s circumstances regardless of the actual risk-based capital ratio of the credit union.

In other words, an examiner can increase a credit union’s individual risk-based capital requirement by subjective action during an examination or “supervisory assessment” based solely on the determination of the examiner that the credit union needs additional capital based on the credit union’s balance sheet risk. There are a number of problematic elements to this new proposed NCUA power.

First, NAFCU is seriously concerned about the legal authority of NCUA examiners to decide on their own the material risks not accounted for in the statutory floor prescribed by the Federal Credit Union Act (FCU Act). The Credit Union Membership Access Act (CUMAA) amended the FCU Act to require the NCUA to take into account material risks that are not accounted for in the statutory floor. This is part of their rules for complex credit unions and is something that can and should be taken in to account when NCUA rules are written, but not on a case by case basis and certainly not by examiners in the field. This is all the more reason why we need a legislative solution rather than the current proposed rule.

Finally, this regulation undermines the entire purpose of the rule. On one hand, the NCUA is saying that the risk weights are designed specifically to factor in a number of risks including concentration risk, interest rate risk, credit risk, market risk, operational risk, and liquidity risk. On the other hand, if the NCUA decides that their risk-based capital ratios don’t do what they are designed to do, then the NCUA can just change the rules for an individual credit union on the fly. Also, the arbitrary and subjective judgment of the examiner can differ from credit union to credit union and examiner to examiner. How are credit unions supposed to look at their portfolio and adhere to the standards laid out in the rule with a constantly moving set of rules?

Just a reminder to folks who haven’t yet seen it, NAFCU’s Capital Reform Issue Page is up and running with great resources such as NAFCU’s Regulatory Alert on NCUA’s proposed rule regarding risk-based capital. If your credit union hasn’t submitted a comment to NAFCU, I encourage you to do so here. The more we know about how the rule affects your credit union, the better advocates we can be for you.

Thank you and lookout for more in-depth looks at part of NCUA’s proposed rule regarding risk-based capital. 

NIST Releases Cybersecurity Framework; Risk-based Capital Rule; NCUA Board Meeting Agenda

Written by Brandy Bruyere, Regulatory Compliance Counsel

Today we will broadly overview the National Institute of Standards and Technology’s (NIST) “Framework for Improving Critical Infrastructure Cybersecurity” (Framework) which was released last week. This is voluntary guidance, developed under Executive Order 13636, which aims to provide “a set of industry standards and best practices to help organizations manage cybersecurity risks.”  Because risk management is an ongoing process that involves “identifying, assessing, and responding to risk,” the Framework is meant to be flexible and address a broad spectrum of cybersecurity risks. The Framework is divided into three main sections: Framework Core, Framework Profile, and Framework Implementation Tiers.

The Framework Core (Core) describes key cybersecurity activities and informative resources that are current industry standards and practices. The Core includes five “Functions”: Identify, Protect, Detect, Respond, and Recover. These Functions are further broken down into Categories such as “Asset Management,” “Data Security,” and “Detection Processes.” The Categories are further segmented into Subcategories that describe specific outcomes such as “Notifications from detection systems are investigated.” Overall, the Functions are intended to “provide a high-level, strategic view of the lifecycle of an organization’s management of cybersecurity risk.”

The Framework Profile (Profile) addresses the cybersecurity outcomes based on the Categories and Subcategories that the organization selected from the Core Functions. The Profile is designed to help organizations “establish a roadmap for reducing cybersecurity risk.” The Profile allows organizations to align and prioritize their particular cybersecurity risks with the characteristics of their own business requirements, risk tolerances, and resources.

The Framework Implementation Tier provides a method for organizations to contextualize and understand their approach for managing cybersecurity risk. There are four Tiers that represent different degrees of processes in place and levels of integration into overall risk management plans—Tier I (Partial), Tier II (Risk Informed), Tier III (Repeatable), and Tier IV (Adaptive). Organizations should select Tiers based upon factors such as the organization’s goals, the feasibility of implementation, the reduction of cybersecurity risk, and available resources.

The Framework is rather complex but intended to be flexible given the diversity of the different organizations that provide critical infrastructure. While this guidance is voluntary, it may be useful to credit unions in managing cybersecurity risk, particularly as this is a risk area that is part of NCUA’s Supervisory Focus for 2014. For more information on cybersecurity risk, check out this NAFCU blog post.

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Risk-based Capital—Just a reminder to folks who haven’t yet seen it, NAFCU’s Capital Reform Issue Page is up and running with great resources such as NAFCU’s Regulatory Alert on NCUA’s proposed rule regarding risk-based capital. If your credit union hasn’t submitted a comment to NAFCU, I encourage you to do so here. The more we know about how the rule affects your credit union, the better advocates we can be for you.

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 NCUA Releases Agenda for Tomorrow’s Board Meeting—NCUA will consider a Proposed Rule to amend Part 710, Voluntary Liquidations of Federal Credit Unions as well as the Share Insurance Quarterly Report.

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Webcast: Post Mortem Panel: Qualified Mortgages and Ability-to-Repay

New Ability-to-Repay and Qualified Mortgage requirements took effect January 10. Our panel of compliance gurus will discuss the best examples of implementation so far.  Register by Mar. 4 to save $100 and utilize these best practices in your own compliance efforts.

Palate Cleanser

This photo appears to be of a dog enjoying the snow. However, I can assure you that Lemmy is actually making a desperate escape after realizing he had been duped into standing in fourteen inches of snow.

 

                       

NCUA’s Flawed Proposed Risk-Based Capital Rule; Free Kick

Written by Ricardo Piñeres, Regulatory Compliance Counsel

At their January monthly board meeting, the NCUA Board of Directors approved Proposed Rule: Prompt Corrective Action; Risk-Based Capital (Part 702) with a 90-day comment period.  I am going to keep my analysis of the rule at a 30,000 foot level.  That said, the proposed rule goes into extreme detail as to how the risk-based capital ratio would be calculated and the different risk weights that would be used if the proposed rule were to go into effect.  So, some of you that are fascinated by numbers may really enjoy sifting through those sections of the proposed rule.

Let’s start with the most basic change that is being proposed – how a credit union is classified for capitalization purposes.  Under the proposed rule, credit unions would be classified as one of the following:

• Well Capitalized (Net worth ratio of 7% or above and risk-based capital ratio of 10.5% or above);
• Adequately Capitalized (Net worth ratio of 6% - 6.99% and risk-based capital ratio of 8% - 10.49%);
• Undercapitalized (Net worth ratio of 4% - 5.99% or risk-based capital ratio of less than 8% with a net worth ratio of 6% or above);
• Significantly Undercapitalized (Net worth ratio of 2% - 3.99% or net worth ratio of 4% - 4.99% and fails to submit/materially implement an approved net worth restoration plan); or
• Critically Undercapitalized (Net worth ratio of less than 2%).

Credit unions with $50 million or less in assets at the end of the previous quarter would be exempt from the risk-based capital ratio requirements.

So, how will the risk-based ratio be calculated under the new rule?  Under the proposed rule, the risk-based ratio would be determined by the percentage of a credit union’s net worth available to cover losses, divided by the credit union’s defined risk-weighted asset base.  The risk-weighted asset base is determined by subtracting a credit union’s NCUSIF deposit and goodwill/other intangibles from the credit union’s risk-weighted assets.  For a general overview of how to calculate all of those components, view this slideshow prepared by the NCUA’s Office of Examination and Insurance.  For a more detailed explanation of the calculations, see the proposed rule.

Along with these new risk-based capital standards, the NCUA has indicated that individual credit unions may be required to maintain higher levels of risk-based capital if the agency raises additional supervisory concerns.

The NCUA has estimated (based on June 2013 call report data) that in excess of 90% of credit unions that would be affected by the changes would be considered either well or adequately capitalized under the proposed rule.  Unfortunately, an estimated 199 credit unions that are currently considered well capitalized would see their status drop under the proposed rule, with 10 of those credit unions being deemed undercapitalized.  Credit unions that are interested in seeing how the proposed rule’s changes would affect them, can view that information using the NCUA’s On-Line Calculator for Proposed Risk-Based Capital Rule.

The NCUA believes that it needs to make these proposed changes in order for the risk-based capital requirements for natural person credit unions to be more in line with the requirements for FDIC, Federal Reserve, and OCC-regulated institutions, as well as more closely resembling the requirements for corporate credit unions.  That being said, this proposal is just the latest example of how the NCUA (and its other regulatory brethren) is unable to properly address many of the issues facing credit unions under the current, flawed regulatory framework.  NAFCU has called on the NCUA to join in advocating for legislative fixes that will give the agency the proper framework to effectively protect credit union members. 

Furthermore, as NAFCU CEO Dan Berger pointed out in his January 28 letter to the NCUA, “[NAFCU] question[s] whether the risk weighting proposed actually matches real risk in the system.  The proposed rule assigns rigid risk-weights to many investments that when properly examined represent much less risk than the assigned risk-weights.”  Therefore, it will be important for credit unions to take part in the comment process to, hopefully, show the NCUA that some of their preconceived notions regarding risk are not applicable and should be weighted differently or, even better, allow for varying risk-weights based on different programs that individual credit unions have implemented to mitigate risks.

Finally, let me take a moment to express some concern regarding the NCUA’s On-Line Calculator for Proposed Risk-Based Capital Rule.  I understand that the agency is attempting to make it easier for individual credit unions to understand how the proposed rule would affect them, but the NCUA is actually oversimplifying a very complex measure.  Having the calculator publicly available could lead to unfair reputational harm and general misunderstandings of a credit union’s health, especially for those credit unions that would see a drop in their capitalization classification.

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Free Kick. After a 16-year absence, Colombia will be returning to the World Cup this summer.  Los Cafeteros put together an impressive qualifying run, finishing second to Argentina in the South American region.  So impressive was their play that many pundits have tipped them as a team to watch in Brasil.  But could their dream be over before it even begins?

During a Coupe de France match on January 22 against Monts d'Or Azergues of France’s third division, Colombia and AS Monaco’s Radamel Falcao Garcia was stretchered off the field in the 40^th minute with what turned out to be a torn ACL in his left knee.  Following a successful surgery in Portugal on Saturday, doctors have given the Colombian striker a 50-50 chance of being available to play for Colombia at the World Cup.  Falcao, for his part, has said that he will take the recovery day-by-day, and will work his hardest to keep his World Cup dream alive.

Many have written that the loss of Falcao would be a crushing blow to Colombia’s hopes.  I disagree.  Call me a homer (I was born in Cartagena, Colombia), but I believe that Colombia has many quality attacking options should Falcao be unavailable to play in Brasil.  This current generation of Colombian football has been blessed by many quality (though young or unproven) attacking players.  From F.C. Porto’s Jackson Martinez and Juan Quintero to Udinese’s Luis Muriel and River Plate’s Teofilo Gutierrez, Jose Pekerman (Colombia’s manager) should have several options to fill Falcao’s role up front, should the AS Monaco forward not recover in time for the tournament.  A bigger problem for Colombia would be a loss in the midfield or center-back positions, as they do not have as much depth in those roles.

That said, it would be a shame if Falcao did end up missing the tournament because he is one of the most exciting strikers in today’s game and is a large part of the reason for Colombia’s return to the World Cup.  Such a talent deserves the chance to show off his skills on the world’s biggest stage.  FUERZA TIGRE!!!

NCUA January Board Meeting Results; 18 Percent Interest Rate Cap to Continue through September 2015; NAFCU Webcast – Advertising and Regulation Z.

Written by JiJi Bahhur, Director of Regulatory Compliance

NCUA January Board Meeting Results. Yesterday, the NCUA Board held its January Board meeting. The agenda for the open meeting included the following action items:

1. NCUA’s      Strategic Plan for 2014 through 2017, and Annual      Plan for 2014 and 2015.
2. Federal      Credit Union Loan Interest Rate Ceiling.
3. Final      Rule, Parts 703, 715 and 741, Financial Derivative Transactions to      Mitigate Interest Rate Risk.
4. Proposed      Rule, Part 702, Prompt Corrective Action and Risk-Based Capital Measures.

By a unanimous vote, all actions presented at the open meeting were approved.  Since it’s Friday, I won’t go into the nitty and the gritty of every action item above, but you can get those details here in this message from NAFCU’s President and CEO, Dan Berger.  Also, you can find the details here in NCUA’s Board Action Bulletin.  And keep a lookout for future blog posts on the final derivatives rule and the proposed risk-based capital rule. 

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18 Percent Interest Rate Cap to Continue.  During yesterday's NCUA Board meeting, the NCUA Board voted to extend the current interest rate cap of 18 percent for most federal credit union loans through September 10, 2015. Had this action not been approved, the cap would have reverted to 15 percent on March 11, 2014.

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Webcast: Advertising and Regulation Z: Are You Covered? As your credit union creates fresh ideas to advertise loan products, make sure you know the latest Reg Z rules regarding social media, print, web and other marketing vehicles. Register by Feb. 12 to save $100 and learn important information to stay in compliance.

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TGIF!  Last weekend, I came to the realization that my children really don't like to share.  Unlike the kiddos, I love to share and below I have shared two pictures that get me giggling each time I see them.  The first is a photo of Ava - she's taking Kyse's car for a spin.  The second photo was snapped right after Kyse hijacked the car back from Ava.

 

Have a great weekend!