Comment: Regulatory Review (2020)

August 3, 2020

Office of the General Counsel
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314

Re: Regulatory Review (2020)
Via e-mail to [email protected]

To the Office of the General Counsel,

The National Association of State Credit Union Supervisors (NASCUS)[1] submits the following comments in response to the National Credit Union Administration’s (NCUA’s) request for comments on the 2020 Regulatory Review. NASCUS appreciates the opportunity to provide NCUA feedback and commend NCUA for inviting recommendations for improvement of the agency’s regulations.

NCUA has recently engaged in rulemaking related to provisions with this year’s review. For example, in the last year NCUA has issued rules related to fidelity bonds (§ 713), audits (§ 715) and appraisals (§ 722).[2] Most of those “recent” rulemakings were prior to the COVID-19 pandemic. As NCUA understands, the COVID-19 impact on the economy and the financial services sector has resulted in a vast reconsideration of financial services rules and regulations as the country and the financial sector work to respond the crisis. Accordingly, we have some comments on those recently issued or amended rules, including recommendations for change that we encourage NCUA to consider as supplements to the recent amendments.

NCUA has recently engaged in rulemaking related to provisions with this year’s review. For example, in the last year NCUA has issued rules related to fidelity bonds (§ 713), audits (§ 715) and appraisals (§ 722).[3] Most of those “recent” rulemakings were prior to the COVID-19 pandemic. As NCUA understands, the COVID-19 impact on the economy and the financial services sector has resulted in a vast reconsideration of financial services rules and regulations as the country and the financial sector work to respond the crisis. Accordingly, we have some comments on those recently issued or amended rules, including recommendations for change that we encourage NCUA to consider as supplements to the recent amendments.

NASCUS comments in detail follow below.

Administrative Issues Related to the 2020 Regulatory Review

The 2020 Regulatory Review includes Part 741 which incorporates, by reference, NCUA’s federal credit union (FCU) rules applicable to FISCUs. For FISCU stakeholders, recommendations on reducing regulatory burden under § 741 must include passing through the § 741 provision to address the substantive rules that are cited in § 741, though located elsewhere in NCUA’s regulations. It has long been NASCUS’s practice to address the numerous § 741 cross references during the Regulatory Review year in which Part 741 is reviewed. In the past, NCUA has responded to our Part 741 related recommendations by characterizing cross referenced regulations as beyond the scope of that year’s Regulatory Review.[4] We respectfully disagree, and ask NCUA to expand on its conclusion that providing comments on regulatory requirements applied to FISCUs by Part 741 are beyond the scope of review when Part 741 is a subject of the Regulatory Review in question.

It is our understanding NCUA has discontinued the practice of publishing a report of the comments submitted in response to the annual Regulatory Review providing stakeholders insight into the perspective of NCUA related to recommendations made. This is unfortunate. NASCUS encourages NCUA to reinstate the practice of responding to the annual Regulatory Review submissions. Stakeholders would also find it educative to review the comment letters submitted each year. We recommend NCUA renew its past practice of publishing response to the Regulatory Review comments submitted by stakeholders on the agency’s website.

Consolidation of NCUA Title II Insurance Rules

The current organization of NCUA’s rules for FISCUs unnecessarily complicates compliance for both credit unions and examiners because most substantive provisions applicable to FISCUs are scattered throughout NCUA’s rules for federal credit unions. NCUA should reorganize its rules to consolidate and co-locate all National Credit Union Share Insurance Fund (NCUSIF) rules for FISCUs in one section (or series of consecutive sections). Reorganizing the rules in this manner would provide significant regulatory relief to credit unions without increasing risk to the NCUSIF.

NCUA’s notice for the 2020 Regulatory Review provides an example of how NCUA’s current organization of its rules overly burdens not only FISCUs but all system stakeholders. Not all the provisions subject to comment in this year’s review apply to FISCUs. Therefore, a reader reviewing the notice on behalf of FISCUs has to spend an inordinate amount of time determining which provisions applied to FISCUs by researching every provision within § 741 to identify any cross references to the rules subject to this year’s review.

As we have noted in previous comments submitted to NCUA, FISCU rules are further complicated by the fact that § 741 often requires compliance with “applicable” provisions found elsewhere in NCUA’s rules. Unless the adjective “applicable” is mere surplusage, this means that some provisions of the referenced rule apply to FISCUs whereas others do not. However, absent clear designation of the “applicable provisions,” the reader can only speculate how many applicable provisions there are, and what they might be.

As NCUA understands, scattering FISCU compliance obligations throughout NCUA’s Rules and Regulations comingled with hundreds of unrelated provisions that do not apply is burdensome, confusing, and ultimately counter-productive to compliance. Just last year NCUA took steps to alleviate such a burden for FCUs. NCUA reorganized and co-located several FCU lending provisions, stating:

Having the various maturity limits spread among numerous sections of the NCUA’s regulations, often separated by large amounts of regulatory text unrelated to maturities, can be confusing to a reader and makes it more difficult to understand the lending regulations. To remedy this, in the proposed rule, the Board proposed to make the NCUA’s loan maturity requirements more understandable and user friendly by identifying in one section (§ 701.21(c)(4)), including cross citations, all of the maturity limits applicable to FCU loans.[5]

Considering that for FISCUs, virtually every one of NCUA’s applicable regulations is scattered in the same confusing manner as the FCU borrower limits NCUA remedied for FCUs, it is long past time NCUA co-locates and consolidates FISCU rules.

Part 712 Credit Union Service Organizations (CUSOs)

NCUA’s CUSO rule applies in part to FISCUs by reference in § 741.222. Specifically, NCUA’s rules apply to FISCUs only with respect to the need to maintain corporate separateness between a FISCU and its CUSOs, the requirement for FISCUs to contractually obligate their CUSOs to submit annual reports to NCUA, and necessity of NCUA and state regulators access to a CUSOs’ books and records.[6] The balance of Part 712 prescribes FCU CUSO activities and the relationship between the FCU and its CUSOs. CUSO wholly owned by FISCUs (either singularly or together) are not bound by NCUA’s limitations on activities or “services to members” nor are the FISCUs bound by § 712 lending or investment limitations. However, any FCU involvement with a CUSO subjects the CUSO to FCU CUSO restrictions.[7]

That FISCU CUSOs are predominantly regulated by state law is appropriate and strongly supported by NASCUS. CUSOs represent an example of dual chartering at work, where dual parallel but distinct credit union systems allow for innovation in both services and supervision.

We offer three recommendations for enhancement of NCUA’s CUSO rule.

De minimis FCU investments in FISCU CUSOs

Recently, NCUA proposed a change to corporate credit union CUSO investment rules that would allow corporate credit union to make a de minimis investment into a natural person credit union CUSO without that CUSO being designated a corporate credit union CUSO pursuant to Part 704.[8] In the Supplemental Material accompanying the proposal, NCUA noted that making that change would benefit the system by enhancing the ability of credit unions to pool resources to pursue innovation without materially increasing risk to the NCUSIF. NASCUS agrees and we wrote in support of NCUA’s proposal.

We recommend NCUA consider a similar amendment to Part 712 that would allow FCUs to make a de minimis investment in a FISCU owned CUSO without the CUSO becoming subject to the FCU CUSO provisions of § 712. Modernizing Part 712 in this manner would benefit FCUs by allowing them to participate with FISCU CUSOs that might be engaged in activities different from those typically permitted for a FCU CUSO. FISCUs could benefit from being able to partner with FCUs without having to surrender the benefits of the state charter powers and authorities of their CUSOs.[9]

Clarification of FCU CUSO Permissible Activities

NCUA Rules and Regulations § 712.5 lists the permissible services that FCU CUSOs may provide. While the limitations in this part do not apply to wholly owned FISCU CUSOs, they would apply to a CUSO in which a FISCU is invested in collaboration with FCUs and therefore could affect FISCUs. Although the list of activities in § 712.5 is introduced by a sentence stating that, “The specific activities listed within each preapproved category are provided in this section as illustrations of activities permissible under the particular category, not as an exclusive or exhaustive list,” the individual descriptions of these activities are so specific that stakeholders have expressed confusion and concerns to NASCUS, for they fear that any change in specifics may make an activity impermissible.[10]

To lessen the risk of confusion and allay concerns arising from the specificity of the current descriptions, we recommend NCUA clarify and simplify § 712.5. Rather than list four categories of loans, § 712.5 should expressly permit lending activities, including originating, servicing, and holding loans as well as buying, selling, and otherwise participating in loans.[11]

CUSOs are Functionally Supervised by NCUA and Should be Exempt from MLO Licensing

NCUA has consistently stated that it lacks supervisory authority over CUSOs sufficient to confer “registration” status upon mortgage loan originators (MLOs) pursuant to the 2008 Safe Licensing Act.[12] We note that NCUA dictates the corporate relationship between CUSOs and their credit union owners, requires CUSOs submit to NCUA access to the CUSO’s books and records, and requires CUSOs register with NCUA and annually submit data.[13]

In view of these NCUA requirements, we recommend NCUA reconsider its finding that it lacks sufficient regulatory control over CUSOs to warrant registration of CUSO MLOs.

Part 713 Fidelity Bond and Insurance Coverage for Federal Insured Credit Unions

In July 2019, NCUA published a final Fidelity Bond rule.[14] The final rule further extended the application of the rule to FISCUs, mandated a board signature on bond contracts, created a sunset of NCUA approval of bond forms, and mandated bond contracts contain an extension of discovery provisions. NASCUS shared its concerns with the final rule in its comment letter filed in 2019.[15]

NASCUS continues to believe the changes finalized in 2019 were unnecessarily far reaching and in some instances, confusing. For example, the new requirement for a board signature on the bond contract confused stakeholders who were unclear if the board member must sign the bond contract every year after reviewing bond coverage or only upon renewal of the contract.

We recommend NCUA revisit the requirement a board member sign the bond contract. NASCUS remains unconvinced this change was either necessary or will prove particularly effective in solidifying bond claims.

We also note that § 741.201 requires FISCUs comply with §§ 713.3, 713.5, and 713.6. There is no cross reference to § 713.2 requiring the board signature, yet NCUA has asserted that this signature requirement does apply to all federally insured credit unions. Either this is yet another example of the insufficiency of NCUA’s practice of incorporation by reference, or there are legitimate questions as to whether §713.2 is binding upon FISCUs.

Part 723 Member Business Loans

In May of 2018, NCUA finalized a comprehensive revision to its commercial lending rule.[16] As a result, NCUA grandfathered existing previously approved state-specific member business lending rules pursuant to § 723.10 of NCUA rules. NCUA’s rules are silent, however, as to the process by which NCUA will evaluate state specific rule applications in the future. We strongly recommend NCUA issue formal guidance as to how state-specific rule applications will be evaluated.

NASCUS is concerned that NCUA might view its latest commercial lending rule as an absolute bar on any differing state regulatory framework. A review of the history of the evolution of both NCUA and state commercial lending rules plainly demonstrates that such a proscription of state innovation in commercial lending regulation would be detrimental to both state and federal credit unions.

In addition, throughout NCUA’s rules, the agency uses the terms “business lending” and “commercial lending” somewhat interchangeably. We would recommend NCUA be more consistent in its lexicon and reserve the term “business loan” for reference specifically to the member business loan limitations imposed by statute.

Part 725 National Credit Union Administration Central Liquidity Facility

NCUA recently published an Interim Final Rule making substantial changes to the Central Liquidity Facility (CLF) in response to the COVID-19 crisis.[17] NASCUS supports the changes to the CLF currently under consideration by NCUA and we reiterate our recommendation NCUA seek to make those changes permanent.[18]

Part 740 Accuracy of Advertising and Notice of Insured Status

Applicable to FISCUs by reference in § 741.211, NCUA’s advertising rules were amended in 2018 to, among other changes, reinstate the exemption for certain advertisements under thirty seconds from inclusion of the official statement and added a fourth shortened version of the official statement.[19] At the time, NCUA declined to address providing flexibility for advertising in emerging social media platforms due to the rapidly evolving nature of the medium.[20]

We recommend NCUA issue an Advanced Notice of Proposed Rulemaking (ANPR) to solicit input from stakeholders specifically on whether amendments are needed in order for credit unions to fully leverage social media platforms in advertising. We are aware that some stakeholders have urged NCUA to allow the official statement to be “one click away” in advertising as is allowed for Truth in Savings and Regulation Z.

We also recommend NCUA consider additional versions of the shortened statement. For example, the FDIC has a ten character official statement for banks: “Member FDIC.”[21] NCUA should consider allowing the eleven character “NCUA Insured” or twelve character “Member NCUSIF” as approved official statements to provide even greater flexibility to credit unions.

Part 741 Requirements for Insurance

As discussed above, our primary concern with § 741 is the confusing and inconsistent structure of NCUA’s rules with respect to FISCUs. Rules for FISCUs should be co-located. In addition, NASCUS recommends NCUA consider changes to § 741, and its underlying rules for FISCUs as follows:

The Subpart Headings of Part 741 are Misleading

Part 741 is divided into two subparts, titled “Subpart A Regulations that Apply to Both Federal Credit Unions and Federally Insured State Chartered Credit Unions and That Are Not Codified Elsewhere in NCUA’s Regulations” and “Subpart B Regulations Codified Elsewhere in NCUA’s Regulations as Applying to Federal Credit Unions That Also Apply to Federally Insured State Chartered Credit Unions.” However, in Subpart A, there are numerous cross references to regulations codified elsewhere in NCUA’s rules that are being applied to state charters (in other words, Subpart B rules). For example, § 741.3 contains multiple cross references to other provisions in NCUA rules. And § 741.3 in not unique in this within Subpart A.

NCUA should correct these misnomers.

Paragraph 741.3(a)(2) requires FISCUs to maintain special reserves for certain nonconforming investments (investments not permitted to FCUs). NASCUS questions the ongoing need for special reserves for nonconforming investments given current GAAP accounting requirements for valuing investments and the inherent supervisory discretion to require reserves for investments carrying material risk. We recommend the special reserves provision be deleted.

Subsection 741.3(e) states “The credit union must not perform services other than those which are consistent with the promotion of thrift and the creation of a source of credit for its members, except as otherwise permitted by law or regulation.” We do not believe that this is intended to be an absolute prohibition, because such a prohibition would reflect a misunderstanding of 12 U.S.C. §1781(c)(1)(E), which requires NCUA to consider whether an applicant for share insurance is a cooperative association organized for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes. An applicant can satisfy these statutory requirements and yet provide other services as well. Other services should be viewed as consistent with the §1781(c)(1)(E), statutory requirement if, for example, they help the credit union improve “the convenience and needs of the members to be served by the applicant, as required by 12 U.S.C. §1781(c)(1)(F). Unless a service to members is performed in a manner that impairs the safety and soundness of the credit union and thus threatens its ability to comply with both 12 U.S.C. §1781(c)(1)(E) and 1781(c)(1)(F), the service should be allow so long as it is authorized under state law. (The powers and authorities of a FISCU is solely a matter of state law.) We recommend that subsection 741.3(e) be deleted, or revised to prevent misunderstanding.

Subsection 741.8(a) requires NCUA’s pre-approval before a FISCU purchases loans from a privately insured credit union, a bank, or a non-depository entity. This provision is far too prescriptive and inserts the NCUA Regional Director into the role of credit union management. NCUA and state regulators have sufficient supervisory tools to respond to a credit union’s unsafe and unsound practices. To require a financial institution to seek permission before making the simple business decision to purchase a loan from another financial institution or non-depository lender hampers business efficiency and is an unnecessary regulatory burden. NASCUS recommends this provision should be deleted.

Section 741.206 applies NCUA’s corporate credit union rule, Part 704, to state chartered corporate credit unions. NCUA recently published proposed changes to Part 704 for which NASCUS submitted supportive comments.[22] Beyond the scope of NCUA’s March 2020 Notice for Comment, there are several additional, and vital, changes needed for the corporate system.

We recommend the following changes to § 741.206 and the provisions application of Part 704:

Restoration of Dual Chartering

While the regulatory and supervisory reaction to the Great Recession and the severe distress of some (not all) corporate credit unions is understandable, it is time to re-evaluate all of Part 704 and, particularly relevant to this Notice for Comment, incorporate directly into § 741.206 greater flexibility for state rules to provide flexibility for state chartered corporate credit unions. A return to flexibility would benefit the entire credit union system in general, and the corporate system in particular, by reintroducing a long absent regulatory and supervisory laboratory of innovation to this critical sector of the credit union system.

Limited Non-CUSO Investment Authority

Section 741.206 should provide state regulators the flexibility to empower corporate credit unions to hold limited equity investments in non-CUSO entities. These equity investments should not be permitted for speculative gain, but rather to allow corporate credit unions to access a “seat at the table” for technological and financial services innovation taking place outside of the credit union realm.

Enhanced Borrowing Authority

Section 741.206 should be amended to allow state regulators to consider providing state chartered corporate credit unions a twelve-month secured borrowing rather than the current 180-day limit. Corporate credit union balance sheets are cyclical. Recognizing this fact, and allowing state chartered corporate credit unions to manage secured borrowings over a full balance sheet cycle will enhance the system’s ability to respond to stress.

Board Governance

Section 741.206 also should be amended to allow state regulators to provide state chartered corporate credit unions greater flexibility in board eligibility requirements. Corporate governance is a matter of state law. We remain unconvinced that NCUA’s prescription on corporate board eligibility mitigates any material risk. We note in fact that NCUA is now considering expanding board eligibility (which we support) in a manner long advocated by NASCUS. We believe it can safely be expanded further.

Section 741.208 incorporates by reference NCUA’s prescriptive rules related to mergers and conversions. The conversion of a state-chartered credit union to a non-credit union charter, and the mergers of two state-chartered credit unions into a single credit union entity are, from a governance perspective, matters for state law and regulation. We recommend NCUA amend § 741.208 to provide for states to enact state specific conversion and merger rules. NCUA’s state-chartered credit union specific conversion or merger rules should narrowly define NCUSIF related safety and soundness requirements, with all remaining corporate governance or member communication requirements rightfully reserved for the state chartering authority.

Section 741.214 incorporates by reference NCUA’s Part 748, regarding reports of crimes and catastrophic acts, and BSA compliance. Paragraph 748.1(c)(4) requires management to notify the board of directors of any SAR filed, and NCUA has interpreted this provision to require monthly notification. While FCUs are required to have monthly board meetings, states vary in requirements related to frequency of board meetings. NCUA should recognize that some FISCUs hold board meetings every-other month, which in our view would be the appropriate time for SAR reporting to the board of directors. We recommend § 741.206 be amended to provide FISCUs may report SAR filings to the board of directors quarterly (or at least at every board meeting).

No Recommendations at this Time

Also subject to review this year were NCUA rules Part 711, Management Official Interlocks,

Part 715 Supervisory Committee Audits, Part 722, Appraisals, Part 745, Share Insurance and Appendix, Part 746 Appeals Procedures, and Part 747, Administrative Actions, Adjudicative Hearings, Rules of Practice and Procedure, and Investigations. We have no specific recommendations for changes to the rules in these Parts at this time.

In addition, this year’s review included the following provisions applicable only to FCUs: Part 717, Fair Credit Reporting, Part 721, Incidental Powers, Part 724, Trustees and Custodians of Certain Tax-Advantaged Savings Plans, and Part 714 Leasing. As these Parts do not directly affect FISCUs, we have no recommendations to submit related to the rules in these Parts.

We thank NCUA for the opportunity to submit recommendations for improving its Rules and Regulations. We would be happy to discuss all of our comments in detail at NCUA’s convenience.

Sincerely,

– signature redacted for electronic publication –

Brian Knight
Executive Vice President & General Counsel

[1] NASCUS is the professional association of the nation’s 45 state credit union regulatory agencies that charter and supervise over 2,000 state credit unions. NASCUS membership includes state regulatory agencies, state chartered and federally chartered credit unions, and other important stakeholders in the state system. State chartered credit unions hold nearly half the $1.6 trillion assets in the credit union system and are proud to represent nearly half of the 122 million credit union members.

[2] See Fidelity Bonds 84 Fed. Reg. 142, at 35517 (July 24, 2019), Supervisory Committee Audits and Verifications, 84 Fed. Reg. 194, at 53303 (October 7, 2019), and Real Estate Appraisals, 85 Fed. Reg. 84, at 23909 (April 30, 2020).

[3] See Fidelity Bonds 84 Fed. Reg. 142, at 35517 (July 24, 2019), Supervisory Committee Audits and Verifications, 84 Fed. Reg. 194, at 53303 (October 7, 2019), and Real Estate Appraisals, 85 Fed. Reg. 84, at 23909 (April 30, 2020).

[4] See the Office of the General Counsel 2016 Regulatory Review Report at page 8. Available at https://www.ncua.gov/files/publications/regulation-review-report-2016.pdf (undated).

[5] NCUA Final Rule, Loans to Members and Lines of Credit to Members, 84 Fed. Reg. 57, at 10972 (March 25, 2019).

[6] See 12 C.F.R §§ 712.2(d)(2)(ii), 712.3(d), 712.4, and 712.11(b) and (c).

[7] 12 C.F.R. 712.3.

[8] Corporate Credit Union, 85 Fed. Reg. 60, at 17288 (March 27, 2020).

[9] While not germane to the 2020 Regulatory Review, NASCUS also encourages NCUA to consider allowing de minimis equity investments in non-CUSOs for purposes of participating in technological innovation.

[10] 12 C.F.R. 712.5.

[11] We note this would also clear up confusion from outdated terminology. For example, current § 712.5 permits FCU CUSOs to originate “business loans.” However, § 723 addresses “commercial loans” as well as “business loans.” This is but one example of how confusion might arise from Part 712.5.

[12] Secure and Fair Enforcement for Mortgage Licensing Act of 2008, Title V, Housing and Economic Recovery Act, Pub. L. No.110-289, 122 Stat. 2659 (July 30, 2008).

[13] See 12 C.F.R. Part 712, Credit Union Service Organizations, and 12 CFR Part 741, Requirements for Insurance. For a complete discussion, see 78 Fed. Reg. 72537 (Dec. 3, 2013). For more information about the CUSO rule, see NCUA Letter to Credit Unions 13-CU-13, Changes to NCUA Regulations related to Credit Union Service Organizations, issued in November 2013, and 14-CU-07, Contractual Agreements with Credit Union Service Organizations, issued in June 2014.

[14] Fidelity Bonds, 84 Fed. Reg. 142, at 35517 (July 24, 2019).

[15] NASCUS Comments on Notice of Proposed Rulemaking: Fidelity Bonds (January 22, 2019).

[16] Commercial Lending, 83 Fed. Reg. 108, at 25881 (June 5, 2018).

[17] NCUA Interim Final Rule: CLF, 85 Fed. Reg. 83, at 23731 (April 29, 2020).

[18] NASCUS – Comments on Interim Final Rule: CLF (RIN 3133-AF18) (June 29, 2020).

[19] Accuracy of advertising and Notice of Insured Status, 83 Fed. Reg. 80, at 17910 (April 25, 2018).

[20] Id at 17912.

[21] 12 CFR 328.3(b)(1).

[22] Corporate Credit Union, 85 Fed. Reg. 60, at 17288 (March 27, 2020). See also NASCUS – Comments on Proposed Rule Corporate Credit Unions (RIN 3133-AF13) (July 27, 2020).