NCUA Finalizes Interest Rate Risk Rule, Addresses Loan Workouts and Derivatives

Jan. 27, 2012 - The National Credit Union Administration (NCUA) made final a rule requiring credit unions to have a written interest rate risk (IRR) policy, among other actions, at its January 26, 2012 open board meeting.

Final Rule, Part 741, Interest Rate Risk
The final rule revises Part 741.3(b) to require a written interest rate risk policy as a requirement for insurance for all federally insured credit unions (FICUs). The final rule establishes a three tier approach.

Tier I
- FICUs with assets over $50 million: Required to have a written IRR policy
Tier II - FICUs with assets $10 million or over and less than or equal to $50 million: Would be required to have a written IRR policy if the total of first mortgage loans held plus total investments with maturities greater than five years is equal to or greater than 100% of its net worth [FICUs meeting the asset threshold but not the portfolio requirement would not be required to have a written IRR policy].
Tier III - FICUs less than $10 million in assets: Not required to have a written IRR policy regardless of their portfolio thresholds under this rule.

In its comments on the proposed rule, NASCUS disagreed with NCUA's three tiered approach. NASCUS suggested NCUA take the approach used by federal bank regulators requiring an effective interest rate risk management program that is appropriate for the size and complexity of the credit union.
The effective date for compliance is Sept. 30, 2012. The final rule includes an appendix intended as a guidance for FICUs on how to establish and IRR policy and effective program.

Proposed Rule and Interpretative Ruling and Policy Statement (IRPS) Loan Workouts and Nonaccrual Policy and Regulatory Reporting of Troubled Debt Restructured (TDR) Loans

The NCUA Board approved a proposed rule amending Part 741 to require FICUs to maintain written policies that address the management of loan workout arrangements and nonaccrual policies for loans, consistent with industry practice or Federal Financial Institutions Examination Council (FFIEC) requirements. Additionally, the proposed rule includes guidelines as an IRPS to assist FICUs in complying with the regulatory reporting of troubled debt restructured loans.

NCUA believes that the proposed rule would streamline regulatory reporting requirements related to TDR loans by removing manual tracking and eliminating confusion between TDRs and other loan modifications. Further, it would reaffirm the practice within the credit union industry of placing loans on nonaccrual status when they reach 90 days past due.

The NCUA Board approved this proposed rule and IRPS with a 30-day comment period. Traditionally, the comment period is longer; however, the NCUA Board intends to move quickly on this issue as loan workout issues remain prevalent for credit unions.

Advanced Notice of Proposed Rulemaking (ANPR) Part 703, Derivative Use for Federal Credit Unions

The NCUA Board approved a second ANPR regarding derivative use for federal credit unions (FCUs). This action follows an ANPR from June 2011 that established a pilot program for a group of FCUs to engage in derivatives as a way to manage risk. NCUA reported that only a few FCUs applied for the pilot program, but they want to continue to understand the benefits and considerations for expanding this utility. This second ANPR seeks information for the drafting of a proposed rule for FCUs to independently engage in derivatives transactions.

The next NCUA Board meeting is Feb. 16, 2012.