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Earlier today CUNA attended the NCUA's June Board Meeting. During the meeting, the NCUA adopted a Final Rule on the Statutory Inflation of Civil Money Penalties, adopted a Final Rule on Freedom of Information Act, adopted a Final Rule on Safe Harbor, issued a Proposed Rule on Corporate Credit Unions, approved Request for Comments on the Overhead Transfer Rate Methodology, and received a Board Briefing on the Enterprise Solution Modernization Program.
The next meeting is scheduled for July 20 at the NCUA’s headquarters in Alexandria, VA. Below you will find more information on each of the topics discussed during the meeting.
I. Final Rule, Part 747, Statutory Inflation of Civil Money Penalties The Board adopted a Final Rule making final the Interim Final Rule adopted on January 5, 2017. The rule implements the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended by the Debt Collection Improvement Act of 1996 and the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, that requires federal agencies to adjust the maximum amounts of civil money penalties to account for inflation.
II. Final Rule, Part 792, Freedom of Information Act The Board approved a Final Rule following the Interim Final Rule that became effective on December 22, 2016. The changes are implementing the FOIA Improvement Act of 2016 (Public Law No. 114-185) and essentially revise the NCUA’s procedures for disclosing records under the FOIA, and for resolving disputes through the FOIA Public Liaison and the Office of Government Information Services within the National Archives and Records Administration. The Final Rule only makes some minor wording changes for consistency and clarification.
III. Final Rule, Part 709, Safe Harbor The final rule amends part 709 to update NCUA’s regulations regarding the treatment by the NCUA Board, as liquidating agent or conservator of a federally insured credit union, of financial assets transferred by the credit union in connection with a securitization or a participation. The amendments will resolve issues that were raised by past modifications to generally accepted accounting principles and parallel changes made to the Federal Deposit Insurance Act. The final rule tracks the language of the FDIC’s corresponding safe harbor rule, which is codified at 12 CFR § 360.6.
While the final rule deals solely by the treatment by the NCUA Board as liquidating agent or conservator, the NCUA concurrently issued a legal opinion dealing with Federal Credit Unions directly with an opinion that an FCU has the authority to issue and sell securities as a power incidental to its operation, and, in the case of Government National Mortgage Association (Ginnie Mae) securities, as a power expressly authorized under the FCUA. Conversation at the Board meeting indicated that guidance would be issued in approximately 3 months and indicated that it would be prudent for any credit union to wait on such guidance before proceeding with any securitization. Staff indicated in their experience it would take approximately 18 months to implement a securitization program so their feeling was the guidance would be issued in sufficient time before any securitization occurred.
IV. Proposed Rule, Part 704 Corporate Credit Unions The Board issued a Proposed Rule for Corporate Credit Unions. The rule does not amend the standards for Prompt Corrective Action (PCA) but does provide revisions to provisions regarding Retained Earnings and Tier 1 Capital. Specifically, the Board proposed to incorporate “GAAP equity acquired in a merger” as a component of retained earnings. This amendment to the definition of “retained earnings” will, in turn, affect the definition of “Tier 1 capital,” which includes retained earnings as one of the components of Tier 1 capital. the current definition of “retained earnings” includes undivided earnings, regular reserve, reserve for contingencies, supplemental reserves, reserve for losses, and other appropriations from undivided earnings as designated by management or NCUA. Including “GAAP equity acquired in a merger” to that list gives recognition to standard accounting conventions for purposes of consolidating records between merged entities. As a practical matter, the Board has treated equity acquired in a merger as retained earnings, but did so in the context of defining contributed capital’s ability to cover losses. The Board believes that expressly including such equity acquired in a merger as retained earnings and referencing GAAP will clarify that this capital is available to cover losses, enhance transparency, and reduce ambiguity.
The Board also proposes to add a provision to part 704 requiring all corporates to achieve an eventual retained earnings ratio of 250 basis points. To that end, the Board proposed adding a definition of “retained earnings ratio” to mean “the corporate credit union’s retained earnings divided by its moving daily average net assets.” Upon attaining this benchmark, a corporate would be permitted to include all PCC, regardless of source, in its Tier 1 capital. The PCA thresholds will remain at their current limits. Until such time as a corporate achieves a 250 basis points retained earnings ratio, it must deduct the amount of PCC exceeding retained earnings by 200 basis points as an inducement to build retained earnings.
The Board also proposed to allow some expanded investment authority to allow a corporate to take on additional risk in certain investment products, with a corresponding retained earnings ratio as a check on the risk associated with the expanded investment authority.
V. Request for Comment, Overhead Transfer Rate Methodology The Board issued a Request for Comment on revising the Overhead Transfer Rate Methodology. The proposed formula applies the following underlying principles to the allocation of agency operating costs:
Time spent examining and supervising federal credit unions is allocated as 50 percent insurance related. The 50 percent allocation mathematically emulates an examination It is consistent with the alternating examinations FDIC and state regulators conduct for insured state-chartered banks as mandated by Congress. Further, it reflects that NCUA is responsible for managing risk to the Share Insurance Fund and therefore should not rely solely on examinations and supervision conducted by the prudential regulator.
All time and costs NCUA spends supervising or evaluating the risks posed by federally insured state-chartered credit unions or other entities NCUA does not charter or regulate (for example, third-party vendors and CUSOs) is allocated as 100 percent insurance related. NCUA does not charter state-chartered credit unions nor serve as their prudential regulator. NCUA’s role with respect to federally insured state-chartered credit unions is as insurer. Therefore, all examination and supervision work and other agency costs attributable to insured state-chartered credit unions is allocated as 100 percent insurance related.
Time and costs related to NCUA’s role as charterer and enforcer of consumer protection and other non-insurance based laws governing the operation of credit unions (like field of membership requirements) are allocated as 0 percent insurance related. As the federal agency with the responsibility to charter federal credit unions and enforce non-insurance related laws governing how credit unions operate in the marketplace, NCUA resources allocated to these functions are properly assigned to its role as charterer/prudential regulator.
Time and costs related to NCUA’s role in administering federal share insurance and the Share Insurance Fund are allocated as 100 percent insurance related. NCUA conducts liquidations of credit unions, insured share payouts, and other resolution activities in its role as insurer. Also, activities related to share insurance, such as answering consumer inquiries about insurance coverage, are a function of NCUA’s role as insurer.
What this means: If this methodology and allocation is adopted for 2017, the OTR would drop from the current 67.7% to 60.0%, meaning both Federal and State Chartered credit unions would see a decrease in their allocation transferred from the share insurance fund. The Operating Fee however, paid only by federal credit unions would increase by about 24% - an increase of $22.8 million from $96.4 million to $119.2 million. This would be an additional 24% increase over the approx. 24% increase from last year.
This proposal will have a 60-day comment period (running from when it hits the federal register.
VI. Board Briefing, Enterprise Solution Modernization Program The Board received a briefing on the status of the Enterprise Solution Modernization Program that is the project overseeing the replacement of antiquated IT applications and infrastructure in the NCUA. Its goal is to provide for more offsite examination and supervision work, provide a single entry point for credit unions to transact business with the NCUA and for staff to access the information they need on credit union. Further if successful it will provide more robust data analytics that leverages currently available information to better direct field resources. The report indicated a Request for Proposal is forthcoming on AIRES Replacement Solution, Technical Foundation for ESM and a Central User Interface and Secure File Transfer Portal. Further, the NCUA indicated it is contemplating a Request for Information on pursuing collecting additional data fields.
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