April 8, 2016
Comment letters on the overhead transfer rate methodology – due to NCUA by April 26 – are taking shape at NASCUS and among other stakeholders in the issue as the deadline draws near. This week, NASCUS began sharing first drafts of its letter with the association’s leadership, legislative and regulatory committee, and other key parties, as it begins honing a final draft. While the NASCUS letter is still being drafted, at least five key points have emerged in the process:
- The current OTR is flawed within its construct and threatens the dual chartering system;
- Despite the proposition that its role is to protect the NCUSIF, NCUA does have safety and soundness examination obligations as a chartering authority;
- NCUA’s unique role as both a chartering authority and deposit insurance administrator obligates the agency to treat FISCUs equitably;
- The OTR is subject to the federal Administrative Procedure Act (as detailed in a landmark legal study NASCUS released last summer);
- There are more equitable ways to allocate NCUA’s operating costs consistent with Congress’ intent.
“This will be one of the most important comment letters that NASCUS has filed over the past two decades, and we are working closely with all of our stakeholders, and others throughout the credit union system, to present a consensus view,” said Lucy Ito, NASCUS president and CEO. “As we get closer to finalizing our comments, we’ll continue to share and gather ideas about this critical subject to present a comprehensive and compelling argument. In the meantime, I urge the state credit union system to pull their own comments together and join us in filing by April 26.”
Suggesting methods for correcting weaknesses of the current OTR methodology, and urging the NCUA Board to keep the responsibility of determining the annual rate (rather than delegate it to staff) are among the recommendations already made by commenters to NCUA.
North Dakota Department of Financial Institutions Commissioner Robert Entringer cited as a weakness of the current OTR methodology the mapping of procedures and regulations that ensures virtually all safety and soundness-related exam costs are assumed to be an insurance related. “No consideration is afforded to these costs as also a chartering-related expense, and no attempt is made to allocate these costs between both the insurance and chartering function,” Entringer wrote. “This is a critical flaw within the assumption of the methodology.” North Dakota’s top credit union regulator also encouraged the NCUA Board to “respect a credit union's choice to be state or federally chartered, and not indirectly subsidize the federal charter through the OTR at the expense of all credit unions, including state chartered credit unions.”
Meanwhile, CEO Doug Kileen of Safe 1 Credit Union (in Bakersfield, Calif.) argued that the NCUA Board alone should make all determinations regarding the OTR, and rescind any actions delegating the determinations to the NCUA staff. “The recent announcement to delegate management of the OTR to the NCUA staff is also troublesome. This action will decrease transparency that is sorely needed in the OTR process,” Kileen wrote. The credit union CEO also recommended that the NCUA Board submit the OTR as a proposed rule for public comment or “establish a structure which allows FISCUs to provide input and comment on OTR methodology and calculations on a bi-annual basis,” he wrote.
Saying he likes his job, he’s not likely going anywhere (such as the board of the Export-Import Bank of the U.S.) and that there will likely be fewer new regulations for credit unions, NCUA Board Member Mark McWatters gave a view during remarks this week of what the near future may hold for him, NCUA and credit unions. CUToday.info reported that McWatters told the National Association of CUSOs (NACUSO) that the “dramatic change” of the resignation of NCUA Board Chairman Debbie Matz (at month’s end) means a two-member board (with himself and Vice Chairman Rick Metsger) and that he will be “loathe to vote in favor of new regulation absent documented evidence there is a danger to the credit union community.” Regarding his nomination to the Ex-Im Bank board, McWatters said he doesn’t see that moving forward. “It seems the Senate will not move. From what I hear, what I read, I’m not going anywhere and that’s fine with me. I like the credit union community. I like my job,” he said.
Two new summaries from NASCUS about interagency guidance for applying customer identification program (CIP) requirements to holders of prepaid cards, and about an NCUA legal opinion on custodial services of deposits being acceptable for federal credit unions, are now posted on nascus.org. The guidance published by federal financial regulatory agencies – and FinCEN – late last month clarifies that a credit union should apply its CIP to certain prepaid cardholders by determining if CIP requirements apply to a particular prepaid card. In determining such, the summary notes, a credit union should determine whether the issuance of the prepaid card results in the creation of an account, and (if so) determine the identity of the credit union’s member. The summary about the opinion on custodial services of deposits (for members only) notes that an FCU does have that authority to provide the services, engaging in activities that are “incidental” to its business. An incidental activity, the summary notes, is one that is necessary or requisite to enable an FCU to effectively carry out the business for which it is incorporated.
A target of extensive advocacy by the financial industry, the proposed “Current Expected Credit Loss” model is expected to be finalized no later than June 30 by the Financial Accounting Standards Board (FASB). However, with regard to implementation, at least one member of the FASB said last week that the board is considering reopening the discussion on the model’s implementation dates (which, for credit unions and other nonpublic business organizations, are fiscal years beginning after Dec. 15, 2019). CECL is intended to require banks and credit unions to book the expected lifetime losses of a loan on the first day of origination. Financial institutions have expressed concerns about the expenses related to calculating such forward-looking allowances, the usefulness of a number that could vary from institution to institution based on individual methodologies and assumptions and – especially from credit unions – a lack of financial statement users (i.e., investors) who would benefit from the disclosure change. FASB is now considering a revised final CECL model, which states that there is no one methodology that has to be used, and that the board’s intent is that each institution needs to apply the method that is appropriate for its portfolio based on the knowledge of its business and processes. The revised model has won both praise (from credit unions and community bank groups) as a “step in the right direction,” and criticism (from other banking groups), saying it doesn’t go far enough.
The NASCUS State System Summit, Oct. 5-7 in Chicago, is less than six months off – and planning is already underway. No doubt, a number of the subjects raised in this report – OTR, CECL, future regulation, NCUA Board make up – be on the agenda. Headquartered at the Westin Chicago River North in the heart of the city, the three-day event brings together credit union regulators and practitioners for mutual exchange and dialog through educational workshops, insightful discussions and networking events geared specifically toward CEOs, state regulators and industry leaders. Register before April 15 and take advantage of savings on registration.
Patrick Keefe, NASCUS Communications, email@example.com or (703) 528-5974