NASCUS Comments: Regulatory Review (2016)
August 8, 2016
Office of the General Counsel
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314
Via e-mail to firstname.lastname@example.org
To Office of the General Counsel,
The National Association of State Credit Union Supervisors (NASCUS) appreciates the opportunity to offer the following comments and recommendations regarding NCUA’s Rules and Regulations pursuant to the 2016 Regulatory Review.1 We commend NCUA for its ongoing rolling rule review pursuant to Interpretive Ruling and Policy Statements (IRPS) 87-2 and 03-2. It is incumbent on regulators to continually evaluate rules and regulations for unnecessary regulatory burden.
The 2016 Regulatory Review covers NCUA Parts 711 – 747. Our comments below address several long-standing concerns with several of those rules. We also reiterate some concerns raised and recommendations made in our comment letters in response to NCUA’s recently completed Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) comment calls.
§712 Credit Union Service Organizations (CUSOs)
NCUA’s CUSO regulation applies, in part, to FISCUs by incorporation in § 741.222. The CUSO rules that apply to FISCUs include §712.2(d)(2)(ii), §712.3(d), §712.4 and §712.11(b) and (c). These are the provisions that require credit unions to maintain corporate separateness from their CUSOs, to contractually obligate their CUSOs to submit annual reports to NCUA, and to provide NCUA and state regulators access to the CUSOs’ books and records.
NASCUS has opposed NCUA expansion of its CUSO rule in both depth and scope. However, to the extent NCUA maintains its current CUSO regulatory framework, we suggest NCUA specifically designate the CUSO Registry to clarify §712.3(d)(4). Currently, the regulation merely states that a CUSO file an annual report directly with NCUA pursuant to NCUA guidance. However, the CUSO Registry as developed and maintained by NCUA is a significant regulatory application. It makes sense to amend §712 to include a specific reference to the CUSO Registry to make clear that the CUSO Registry is the means by which CUSO’s report directly to NCUA.
§713 Fidelity Bond and Insurance Coverage for Federal Credit Unions (FCUs)
Portions of NCUA’s Bond Coverage rule apply to FISCUs by incorporation in §741.201, which directs FISCUs to follow the “minimum fidelity bond coverage stated in Part 713.” However, Part 713 contains more than just the numerical minimum bond coverage, it contains all the requirements for FCU bond coverage, including, among others, board duties (§713.2), forms to be used (§713.4), and from what entity coverage may be purchased (§713.3). NCUA’s reference by incorporation is unclear the extent to which these requirements apply to FISCUs.
As discussed in more detail below, NCUA could remove any confusion regarding applicability of a rule, and ease regulatory burden for credit unions, by retiring its practice of applying federal credit union (FCU) rules to FISCUs by incorporating references in Part 741. However, until NCUA undertakes that step, it is incumbent on the agency to make sure its regulations are clear.
NCUA’s rule, which notes in its title that it is for FCUs, contains numerous provisions related to tangential bond coverage issues such as board responsibilities and forms. We do not believe these provisions were intended to apply to FISCUs. NCUA should amend §713 and §741.201 to clarify that only the bond coverage amounts, established by §713.5, apply to FISCUs.
§ 715 Supervisory Committee Audits and Verifications
NCUA’s Supervisory Committee Audits and Verification rule applies to FISCUs by incorporation in §741.202. Like NCUA’s Bond Coverage rule, the agency’s Audit and Supervisory Committee rule is imprecise in identifying which of the sub-provisions of §715 are incorporated by reference in §741.202.
NCUA should amend §741.202 to clarify that only the following provisions of Part 715 apply to FISCUs: §715.4, §715.6, §715.7, and §715.8.
Part 722, Appraisals, applies to FISCUs by incorporation in §741.203. As NCUA knows, the Federal Financial Institutions Examination Council (FFIEC) continues to study issues related to the regulatory requirements for appraisals. Specifically, the rise in housing prices, and some difficulties related to the availability of qualified appraisers in some geographical areas, has led to discussions as to whether the current regulatory thresholds for requiring appraisals are too low.
NCUA should ensure any changes in appraisal requirements implemented by other federal bank regulators are carefully considered for the credit union system.
§740 Accuracy of Advertising and Notice of Insured Status
NCUA’s official share insurance advertising rules apply to FISCUs by incorporation in §741.211. NCUA’s rule currently provides for a shortened version of the official statement. The ability for credit unions to use the shortened version is important in an age of evolving media focused on far reaching, rapid dissemination of limited length messages.
We recommend NCUA continue to evaluate its mandated official statement to determine whether further shorthand could be appropriate. For example, the current short version, “Federally insured by NCUA,” is still longer than the Federal Deposit Insurance Corporation (FDIC) short form “Member FDIC.”2
§745 Share Insurance and Appendix
NCUA’s Share Insurance and Appendix rule, applicable to FISCUs by incorporation in §741.212, includes the provisions describing share insurance coverage and the various accounts covered by share insurance.
NCUA has asked Congress to consider changes to the statutory structure of the share insurance fund, including eliminating the equity ratio cap, allowing for risk based premiums, and changing the calculation from insured shares to assets. Any of these changes represent significant departure from the historic structure of the share insurance fund. Yet NCUA has not engaged stakeholders in a discussion of these desired changes, and what they could mean for the cooperative credit union model.
The above proposed changes would structure the share insurance fund in a similar fashion to the FDIC fund for banks. We agree the time is right to discuss how the share insurance fund should be structured in the future, understanding that perhaps the current structure might remain best suited for the credit union movement. We urge NCUA to engage state regulators and stakeholders in evaluating any changes sought for the fund.
§747 Administrative Actions, Adjudicative Hearings, Rules of Practice and Procedure, and Investigations
The administrative provisions of NCUA’s rules apply to FISCUs by incorporation in §741.3(a) and §741.313. While §747 contains the appeals process for prompt corrective action (PCA), NCUA’s non PCA supervisory appeals process is contained in a policy statement and not in regulation. We recommend NCUA amend its non PCA appeal process and incorporate the revised process in §747.
Currently, a FISCUs appeal of a supervisory determination made by NCUA is governed by Interpretive Ruling and Policy Statement (IRPS) No.: 11-1. Pursuant to the IRPS, a credit union may appeal “material supervisory determinations” which are limited to (1) composite CAMEL ratings of 3, 4, and 5 and all component ratings of those composite ratings; (2) adequacy of loan loss reserve provisions; and (3) loan classifications on loans that are significant as determined by the appealing credit union.3 While the appealing credit union has a right to make its case “in-person,” NCUA reserves the right to work out the dispute through teleconference. Much of the appeal function remains shrouded in mystery. For example, NCUA provides no readily available information on how many appeals are filed each year, how many of those appellants were granted in-person appeals, and what were the overall disposition of appeals.
A first step to improve the appeal process would be for NCUA to publish information, in the aggregate, about how many appeals are filed each year, what the subjects of the appeals were, and the dispositions of those appeals. Providing those numbers would allow stakeholders to better evaluate the efficacy of appeals. This in turn could instill greater confidence in the due processes surrounding the supervision program. In addition, NCUA should incorporate this process in its rules and regulations.
Consolidation of NCUA Title II Share Insurance Rules and §741 Requirements for Insurance –
The organization of NCUA’s Rules and Regulations for FISCUs is so convoluted as to present a significant regulatory burden. Simply consolidating rules applicable to FISCUs would make it easier for FISCUs to understand which rules apply, in turn facilitating compliance. Consolidation would also reduce confusion among examiners, state and federal, as to which rules apply to FISCUs. We note that consolidating rules requires no lengthy safety and soundness analysis, or balancing of supervisory concerns with regulatory burden.
In the past, NCUA has rejected our recommendation while noting that we were free to provide credit unions and examiners a consolidated version of the rules of our own making. Suffice to say, a third party’s reorganization of the rules is unofficial and no substitute for official, properly organized rules. We note both the Consumer Financial Protection Bureau and the Financial Crimes Enforcement Network undertook reorganization of their rules to make those rules more accessible, searchable, and understandable. NCUA should follow their example.
We commend NCUA on its longstanding practice of reviewing 1/3 of its rules and regulations every year. Please do not hesitate to contact me to discuss any of these suggestions and recommendations.
Executive Vice President and General Counsel
1 NASCUS is the professional association of the 46 state and territorial credit union regulatory agencies.
2 12 U.S.C. 328.3(c).
3 NCUA Guidelines for the Supervisory Review Committee, p. 1. Available at https://www.ncua.gov/Legal/Documents/IRPS/IRPS2011-1.pdf.