Nov. 25, 2015

A feast of OTR contrasting views
If, on Thanksgiving Day, you find you’ve had your fill of food, family and football (not necessarily in that order), consider retiring to a quiet corner and feasting on the comments of NCUA Board members at last week’s meeting with regard to the Overhead Transfer Rate (OTR). You’ll find some tidbits there indicating the debate about the OTR is far from over. At the board’s meeting last week, a new, higher rate of 73.14% was approved on a vote of 2-1, with Board Member J. Mark McWatters dissenting. Before the vote was taken, both McWatters and Board Chairman Debbie Matz read individual statements about their positions. Matz called the annual setting of the OTR a “thankless job” because state or federal credit unions are unsatisfied with the results. “All we can do is ensure the methodology accurately values the work done by NCUA and state examiners, then fairly allocates costs between federal and state charters,” she said at last week’s meeting. But McWatters called again for the agency to draft and submit a formal OTR rule for a 90-day public comment period in accordance with the Administrative Procedure Act (APA) (much like recommendations of a NASCUS-commissioned legal analysis, released in June). “In order to negate the appearance of a conflict of interest, follow the letter and spirit of the APA, respect the dual charter system, and add a strong element of much needed transparency, I encourage the NCUA to submit, without hesitation, the OTR as a proposed rule for public comment under the APA,” McWatters said. The board also voted – again with McWatters voting no – to delegate authority for setting the annual OTR to the director of the agency’s office of examination and insurance. “It might seem counterintuitive that at the same time we’re planning to put the methodology out for comment, we’re proposing to give staff the authority to calculate each year’s (OTR). But, this process actually parallels the separation of duties inside a credit union, where the board sets policy and staff executes the policy,” the NCUA Chairman said. McWatters, in his comments, blasted that approach. “The OTR methodology is not a ‘plug and play’ formula but, instead, relies upon judgment and perspective as to the component parts of the methodology that should reside with the Board in a public meeting,” he said. “I cannot help but conclude that the true reason for the delegation resides in the desire of the existing Board majority to lock-in the OTR today through the transfer of authority to the NCUA staff so as to avoid the ‘awkwardness’ of a 2 to 1 vote on the OTR or the ‘uncertainty’ that may arise in the event a future NCUA board consists of only two members.” We’ve posted the board members’ individual statements on our website – under our “OTR Resources” section -- so you can compare and contrast these comments, and others, on your own.

Matz comments about OTR at NCUA Nov. 19 board meeting
McWatters comments about OTR at NCUA Nov. 19 board meeting

Report details approach for RBC supplemental capital rule
Recommendations about how additional forms of supplemental capital could be included in NCUA’s risk-based capital ratio are expected to be made by a working group to the agency “in the near future,” according to a 228-page report submitted to Congress Monday by NCUA. In the Report to the House Financial Services Committee on the Final Risk-Based Capital Rule, NCUA details the steps it has taken, and expects to take, to include additional forms of supplemental capital in the numerator of the risk-based capital ratio. Among them: A working group consulting with stakeholders to develop a separate proposed rule regarding supplemental forms of capital that could be included in the numerator; review by the group of the comments received on the RBC proposal on the issue; study by the group of alternative forms of capital used internationally and within the cooperative system; discussion with “practitioners” who are “highly interested or experienced with alternative forms of capital.” The report stated that the agency plans to address additional forms of supplemental capital -- with specific criteria and requirements -- in a separate proposed rule, which the report noted is necessitated under the Administrative Procedure Act (APA). “Issuing a new, more specific and detailed proposed rule on supplemental capital will give interested parties full opportunity to comment on it,” the report stated. The report also notes that NCUA intends to finalize a new supplemental capital rule before the effective date of the RBC rule in 2019. Of particular interest to the state credit union system: the report acknowledges that NCUA’s current authority to recognize supplemental capital for risk-based capital purposes is strictly limited to FISCUs where supplemental capital is permitted by state law, and that authority does not extend to any FCUS nor to FISCUs in states without supplemental capital authority from their state regulator.

NCUA Report to House Fin. Svcs. Cmte: Final Risk-Based Capital Rule (See page 145 for Appendix B: Supplemental Capital)

Summaries outline rule on CLF-related loans, Reg Alert on MLA
A final rule on Central Liquidity Facility (CLF)-related loans from corporate credit unions, and an NCUA “regulatory alert” on the Military Lending Act (MLA) final rule issued by the Department of Defense, are summarized and posted on the NASCUS website. Under the rule affecting CLF-related bridge loans, which excludes the loans from the corporate credit union limit on aggregate unsecured lending to one borrower, the NASCUS summary points out that the final rule will apply to situations where a natural person credit union has been approved for a loan by the CLF and obtains a bridge loan from a corporate until the CLF funds can be transferred. For purposes of determining minimum capital requirements, the NASCUS summary notes that the final rule also excludes CLF-related bridge loans from the calculation of ‘‘net assets’’ and ‘‘net risk-weighted assets.’’ The summary of NCUA’s regulatory alert on the DoD’s final MLA final rule (available to members only) notes that the MLA is designed to protect service members by applying two broad requirements to creditors: That the creditor may not impose a Military Annual Percentage Rate (“MAPR”) greater than 36% in connection with an extension of consumer credit to a covered borrower, and; that, when extending consumer credit, the creditor must satisfy certain other terms and conditions, including specific disclosures, prohibitions on mandatory arbitration, and prohibitions on prepayment penalties.

NASCUS Summary: Final rule on CLF-related loans from corporate credit unions
NASCUS Summary: NCUA regulatory alert, DoD rule on MLA (members only)

Marijuana biz banking, MSBs, human trafficking hot topics at conference
The risk of running afoul of Bank Secrecy Act (BSA) and anti-money laundering (AML) requirements that may arise from serving legal marijuana businesses, money services businesses (MSBs) and even those who are engaging in human trafficking (and surreptitiously using credit union services to do so) were all topics broached at the NASCUS/CUNA BSA Conference last week (Nov. 15-18) in Fort Lauderdale. Many of the more than 300 participants at the event became vigorously engaged in the discussions over the issues. During a presentation by a representative of the Financial Crimes Enforcement Network (FinCEN) about guidance for providing banking services to legal marijuana businesses, a number of audience members noted that much of the guidance they have received has been confusing and ambiguous. Some said they felt as if they were being asked to police activities of their members. Others expressed frustration with how far they had to go in checking backgrounds of members and their businesses. Service to MSBs was also a hot topic – particularly after the group was reminded by NCUA BSA Program Officer Judy Graham that MSBs, regardless of size or operation scope, are required to have both a BSA officer and a BSA/AML plan, as well as to register with FinCEN. Meanwhile, Timea Nagy, a survivor of human trafficking, urged credit unions to be on the lookout for signs of human trafficking activities among their account holders, which includes: life style, who the account holder is, the type of businesses involved in transactions, the type of transactions involved, where the money is going, and who is ultimately profiting. Brendan Brothers of Verafin (a financial information security firm, which sponsored Nagy’s appearance) recommended that BSA officers follow up with law enforcement when filing a suspicious activity report (SAR) that they believe is related to human trafficking. “You are the first line of defense; you have the money, you have the control,” he told the group.

BRIEFLY: Happy Thanksgiving!
It’s hard to believe that tomorrow is Thanksgiving, 2015 – the year has certainly flown by. From everyone at NASCUS to all of you: Have a terrific, and safe, Thanksgiving holiday.

Information Contact:
Patrick Keefe, NASCUS Communications, or (703) 528-5974