Summary: Request for comments, NCUA Regulatory Reform Agenda (Aug. 2017)

NCUA Regulatory Reform Agenda

Summary
Prepared by NASCUS Legislative & Regulatory Affairs Department
August 2017

On February 24 of this year, President Trump issued Executive Order 13777, Enforcing the Regulatory Reform Agenda, to direct federal agencies to review their regulations to determine which regulations may be repealed, replaced, or modified. While the executive order does not apply to NCUA, the Agency has chosen to adhere to its spirit and undertake a review of all rules and regulations.  NCUA has published a recommended regulatory reform agenda that groups its existing rules into three Tiers for revision over the course of four years.

NCUA’s Regulatory Reform Agenda may be read here. NCUA requests comments be submitted by November 20, 2017.

Summary

NCUA formed a Regulatory Reform Task Force to perform a review of all NCUA Rules and Regulations. The Task Force issued a report to the NCUA Board recommending NCUA consider changes to 41 of its Rules and Regulations. In some cases, these recommendations apply to specific provisions within an NCUA rule. In other cases NCUA identified entire rules for change.

Annual Regulatory Review to be suspended
The Task Force has proposed suspending NCUA’s annual review of 1/3 of its regulations. NCUA has been doing the 1/3 review since 1987 pursuant to IRPS 87-02. NASCUS files comments annually on the Regulatory Review with mixed results.  The NCUA Task Force recommended renewing the annual review in 2020 (after the 4 year review and reform being conducted under the proposed Regulatory Reform Agenda).

Tier 1 Reforms
NCUA identifies the following Regulations as “Tier I” meaning they are the most important targets for reform and should be undertaken within the first two years of the four year project. Of the 19 provisions in Tier I, NCUA proposes simply clarifying four provisions, removing two provisions, expanding CU authority in two provisions, “improving” eight provisions, and expanding relief in three provisions.

• Clarify § 701.21(c)(4),(f), & (g) —Loans to Members and Lines of Credit to Members: Maturity Limits

 NCUA proposes combining all the maturity limitations into one section because currently FCU maturity limits are not co-located and hence confusing. NCUA would also incorporate into the rule its 2012 legal opinion making clear a lending action (like a troubled debt restructuring) that does not meet the GAAP standard for a ‘‘new loan’’ is not subject to the maturity limits. NCUA is also considering extending maturity limits for 1–4 family real estate loans and other loans (such as home improvement and mobile home loans) (currently 40 years or longer on case-by-case basis). These provisions are FCU only.

• Clarify § 701.21(c)(5); 701.22(a) & (b)(5); 723.2 & 723.4(c) Single Borrower and Group of Associated Borrowers Limit

NCUA proposes combining the single borrower (and group of associated borrowers) limits into one provision. The MBL aspects of these changes apply to FISCUs by incorporation in Part 741.203.

• Remove § 701.21(h) – Third-Party Servicing of Indirect Vehicle Loans

NCUA would eliminate the existing portfolio limits and related waiver provision and replace those with a comprehensive third-party due diligence regulation. This provision applies to FISCUs by reference in Part 741.203.

• Clarify § 701.21—Loans to Members and Lines of Credit to Members

NCUA would amend the provision “to provide flexibility with respect to senior executive compensation plans that incorporate lending as part of a broad and balanced set of organizational goals and performance measures.” This provision may apply to FISCUs, depending on how NCUA incorporates this change, by reference in Part 741.203.

• Improve Appendix A to Part 701—Federal Credit Union Bylaws

 NCUA proposes a working group to recommend changes to FCU Bylaws for the first time in a decade. This provision is FCU only.

• Expand Authority Appendix B to Part 701— FCU FOM

 NCUA proposes revising FCU FOM to:

• Give FCU’s the option, in lieu of a presumptive community, to submit a narrative to establish common bond for community
• Add public hearings for determining well-defined local communities with populations over 2.5 million
• Removing the population limit on a community consisting of a statistical area or a portion thereof and when such an area is subdivided into metropolitan divisions and permit a FCU to designate a portion of the area as its community without regard to division boundaries

• Improve Appendix B to Part 701— Emergency Mergers

NCUA has already proposed this change: revising the definition of the term ‘‘in danger of insolvency’’ for emergency merger purposes to allow NCUA to exercise the emergency merger provision earlier in the case of a declining credit union. The significance of the emergency merger provision for NCVUA is that it allows NCUA to ignore its FOM rules to facilitate a merger. This provision is NCUA/FCU only.

• Expand Relief § 702.501-506 — Capital Planning and Stress Testing

NCUA will explore raising the threshold for required stress testing to an amount greater than $10 billion, and assigning responsibility for conducting stress testing to the credit unions. Both are long-standing NASCUS recommendations. This provision applies to FISCUs by reference in Part 741.3.

• Improve § 702— Risk-Based Capital (RBC)

NCUA will consider extending the January 1, 2019, RBC implementation date. NCUA would also consider changing the definition of complex to narrow the applicability of the rule, allowing for credit unions with high net worth ratios to be exempt, and simplifying the overall risk category and weighting scheme. Alternative Capital is addressed under Tier 2. This provision applies to FISCUs by reference in Part 741.3.

• Improve § 704—Corporate Credit Unions

NCUA has already issued a proposal rule to amend Part 704. NCUA is counting GAAP equity acquired in a merger as Tier I capital allowing perpetual contributed capital to count as Tier I capital once a corporate meets a retained earnings requirement of 2.50%. NASCUS supported both of these proposals in our comment letter and urged NCUA to consider further changes. This rule applies to state-chartered corporate credit unions by reference in Part 741.3, Part 741.201, and Part 741.206.

• Improve § 713—Fidelity Bond and Insurance Coverage

NCUA recommends assessing part 713 outside of the Regulatory Reform Task Force process (and notes there is litigation related to Part 713). NCUA is considering whether there is a way to implement the FCUA’s bond coverage requirement is a less costly manner. This provision applies to FISCUs by reference in Part 741.3 and Part 741.201.

• Remove § 715.9(c)(6)—Supervisory Committee Audits and Verification

NCUA is considering eliminating the provisions requiring outside audits be completed within 120 days of end of year under audit and merely require credit unions obtain the audit so as to meet the requirements of Part 715. Parts of § 715 apply to FISCUs by reference in Part 741.6 (§715.2(e) and (f) and §715.8) as well as Part 741.202 (applying the “audit” requirements). A longstanding issue has been clarification of what parts of § 715 do not apply to FISCUs.

• Clarify § 715.7(c)— Audit per Supervisory Committee Guide

NCUA is considering eliminating its Supervisory Committee Audit Guide and replacing it with provisions establishing minimum standards that must be met. Parts of § 715 apply to FISCUs by reference in Part 741.6 (§715.2(e) and (f) and §715.8) as well as Part 741.202 (applying the “audit” requirements). A longstanding issue has been clarification of what parts of § 715 do not apply to FISCUs.

• Expanded Authority Securitization

NCUA has already completed this recommendation. NCUA has issued a legal opinion interpreting FCU’s incidental powers to authorizing the buying and selling of securities and finalized a safe harbor ruled related to liquidations. See NASCUS’ summary of the legal opinion here.

• Expanded Relief § 722—Appraisals

Federal bank regulators are currently coordinating on an interagency rulemaking to raise appraisal thresholds. NCUA, part of those discussions as a FFIEC member, is recommending withdrawing from participating in the interagency rulemaking and promulgating its own rule. NCUA’s appraisal rule differs from bank appraisal rules in that it does not distinguish with respect to the appraisal threshold requirement, between different types of real estate secured loans. Under NCUA’s rules the dollar threshold for any real estate secured loan is $250,000. The banking agencies’ current appraisal regulations have the same $250,000 threshold as NCUA’s regulation for most real estate related loans, but also recognize a separate appraisal threshold of $1 million for certain real estate related business loans that are not dependent on the sale of, or rental income derived from, real estate as the primary source of income. This rule applies to FISCUs by reference in Part 741.203.

• Expanded Relief  § 740—Accuracy of Advertising & Notice of Insured Status

NCUA indicates that it has drafted a proposed rule to allow FICUs to use a fourth version of the official advertising statement, ‘‘Insured by NCUA.’’ The draft also expands a current exemption from the advertising statement requirement regarding radio and television advertisements and eliminates the requirement to include the official advertising statement on statements of condition required to be published by law. Finally, it requests comment about whether the regulation should be modified to accommodate advertising via new types of social media, mobile banking, text messaging and other digital communication platforms, including Twitter and Instagram. The proposed NCUA rule has not been published. This provision applies to FISCUs by reference in Part 741.211.

• Improve § 741.4(j)(l)(ii)— NCUSIF Dividends

NCUA has already proposed changes to the NCUSIF. NCUA would preclude a credit union that has already converted to another form of insurance from receiving a subsequently declared NCUSIF dividend.

• Improve § 746 Subpart A Supervisory Review Committee

NCUA has already proposed these recommendations to expand and formalize procedures by which federally insured credit unions may secure review of material supervisory determinations by NCUA’s Supervisory Review Committee (SRC). Read NASCUS’ summary of the proposed rule and NASCUS’ comment letter here.

• Improve § 746 Subpart B – Appeals

NCUA has already proposed a rule to implement the Task Force’s recommended changes to the Appeals process to establish uniform procedural guidelines to govern appeals and provide an avenue by which appellants may request the opportunity to appear in person before the Board. Read NASCUS’ summary of the proposed rule here and NASCUS’ comment letter here.

Tier 2 Reforms
Rules categorized as Tier 2 have been identified by NCUA’s Regulatory Reform Task Force for action in year three of the four year agenda. Of the 10 Tier 2 rules, three are being clarified, one is being eliminated, two are expanding credit union authorities, and four are being improved

• Remove § 701.22(b)(5)(ii) and (c) – Loan Participations

NCUA would eliminate the $5 million (or 100% net worth) limit on loan participations purchased from any one lender and the corresponding waiver provision in favor of having CUs establish their own limits in policy. Loan participations would also be subject to 3rd party due diligence requirements if exceed 100% net worth. This provision applies to FISCUs by reference in Part 741.8 and Part 741.225.

• Clarify & Expand Authority § 701.23—Purchase, Sale, and Pledge of Eligible Obligations

NCUA would co-locate all authorities to purchase loans and other assets in one section of its rules. NCUA will consider eliminating any limits on purchase of member obligations and also eliminate CAMEL restrictions and other limitations not required by the FCUA. Parts of §701.23 applies to FISCUs by reference in § 741.8 (§ 701.23(b)(1)(i), and (iii), and (iv)).

• Improve § 741.8—Purchase of Assets and Assumption of Liabilities

NCUA is considering whether NCUA pre-approval is necessary for purchases of loans and assumption of liabilities from non-FICUs. This has been a long time NASCUS recommendation.

• Expand § 701.32—Payment on Shares by Public Units and Nonmembers

NCUA will consider raising the nonmember deposit limit from 20% to 50%. FCUs must be LICU designated to accept these deposits, but FISCUs do not. However the limitations apply by reference § 741.204. Nonmember deposits in FISCUs are also addressed in Part 741.10, requiring notice to nonmembers that their deposits are not insured.

• Improve § 701.34 – Acceptance of Secondary Capital accounts by LICUs

NCUA has already issued an ANPR earlier this year addressing these issues. NASCUS’ summary of the ANPR is available here and NASCUS’ comment letter may be read here. This provision applies to FISCUs in part by reference in § 741.204.

•  Clarify & Expand § 701.38—Borrowed funds from natural persons

NCUA would need to amend FCU borrowing and investment authorities to accommodate natural person FCUs’ use of supplemental capital. This provision is FCU only.

• Improve § 702—Capital Adequacy

NCUA will consider narrowing the definition of complex credit union to exempt high net worth CUs. Any changes would need to be coordinated with changes to supplemental and secondary capital, and changes to the FCU borrowing rule. This provision applies to FISCUs by reference in Part 741.3.

• Expand Authority Alternative Capital

NCUA is considering whether to propose a rule on alternative forms of capital FICUs could use in meeting capital standards. NCUA notes it should decide whether to make changes to the secondary capital regulation for LICUs & whether or not to authorize supplemental capital.

• Improve & Expand § 703—Investment and Deposit Activities

 

For FCU investment authority, NCUA would consider eliminating regulatory limitations not found in the FCUA and implementing a principles-based approach focused on governance for investing activity. NCUA would also eliminate the FCU pre-approval requirement for derivatives authority and substitute with the simple notice requirement that currently applies to FISCUs.  Generally Part 703 does not apply to FISCUs, except with respect to nonconforming investment reserve requirements (Part 741.3) and doing business with corporate credit unions (Part 741.219).

• Clarify § 701.21(i) – Loans to members and lines of credit to members

NCUA would relocate §701.21(i) regarding option purchases into Part 703 Subpart B—Derivatives Authority to have all options/derivatives authority in one section.

Tier 3 Reforms
The Tier 3 regulations are those that NCUA would consider for changes in the 4th year of their agenda after further discussion and consideration. NCUA also notes that the Tier 3 regulation changes would be dependent on decisions made under Tiers 1 and 2 as well as other developments in the intervening time. Of the 12 Tier 3 rules, NCUA recommends clarifying two, removing three, expanding CU authority in one, improving five, and expanding relief in one.

• Simplify & Improve – Third-Party Due Diligence Requirements

NCUA is considering adding a comprehensive 3rd party due diligence regulation and then removing or co-locating such provisions from other regulations.

• Simplify & Improve § 701.21(b) – Loans to Members and Lines of Credit to Members: Preemption of state laws

NCUA is considering “enhancing” their preemption of state laws applicable to FCUs that are multi-state lenders. This provision is FCU only, BUT might provide collateral relief to FISCUs thru most favored lender status.

• Expand & Clarify § 701.21(c)(7)(ii) – Loan Interest Rates

NCUA will consider using a using a variable interest rate for FCUs instead of the fixed adjustment every 18 months as well as consider changing their means of notice of the rate (the rule mandates a Letter to FCUs). This provision is FCU only.

• Remove/Improve § 701.37 – Treasury Tax and Loan Depositaries and Financial Agents of the Government

NCUA will evaluate if this regulation remains relevant and necessary. FCUs only.

• Clarify § 709.5 – Involuntary Liquidation

NCUA will consider revising the payout priorities to make unsecured creditors “pari passu” with the NCUSIF. Currently, unsecured creditors are senior to the NCUSIF. This provision applies to FISCUs by reference in Part 741.4 as well as Part 741.218.

• Remove & Expand § 712—CUSOs

NCUA will examine the CUSO permissible activities for FCU CUSOs. Parts of NCUA’s CUSO rules apply to FISCUs by reference in Part 741.222 (§712.2(d)(2), §712.3(d), §712.4, and §712.11(b) and (c)). NCUA’s permissible activity provisions do not apply.

• Improve § 714—Leasing

NCUA will review Part 714 to identify if any changes or improvements are needed. FCU only.

• Clarify § 725 CLF

NCUA will streamline the CLF regulations, facilitate the use of correspondents, and reduce minimum collateral requirements for certain loans/collateral. The CLF is referenced in Part 741.12 as a means by which a FISCU may meet liquidity requirements. Part 741.210 requires FISCU members of the CLF to comply with § 725.

• Remove § 741.2 – Maximum Borrowing Authority

NCUA will consider removing the 50% borrowing limit for FISCUs, allowing state law to govern FISCU borrowing limits. NASCUS has recommended this in the past.

• Remove § 741.3(a)(2) Special Reserve for Nonconforming Investments

 

NCUA will consider eliminating the special reserve requirement as no longer necessary and not consistent with GAAP. There are 11 FISCUs from 8 different states that report a total of $4.4 million in this account on the Call Report as of December 31, 2016.

• Improve § 748—Security Program, Report of Suspected Crimes, Suspicious Transactions, Catastrophic Acts, and Bank Secrecy Act Compliance

NCUA recommends forming a working group and using an ANPR to this entire regulation. This provisions applies to FISCUs by reference in Part 741.214.

• Improve § 749—Records Preservation Program and Appendices

NCUA recommends forming a working group and using an ANPR to this entire regulation. This provision applies to FISCUs by reference in Part 741.215.