Board Briefing – Share Insurance Fund Quarterly Report

Today’s report on the Share Insurance Fund showed total income of $72.1 million and net loss of $19.3 million for the quarter ending 6/30/2020. The balance sheet indicated total liabilities and net position of $17.678 billion, an increase of roughly $965 million from the previous quarter. The Fund’s reserve balance stands at $184 million as of the end of the second quarter, with $20.5 million being for specific reserves. The number of CAMEL Code 4/5 credit unions decreased slightly from the preceding quarter to 166; CAMEL Code 3 credit unions decreased to 785.

The Fund’s equity ratio declined from 1.35% at year-end 2019 to 1.22% as of June 30, below the Normal Operating Level of 1.38%. The primary driver of the decline is strong growth in insured shares (of 12.95%).

As a result of share growth, many credit unions’ capitalization deposits have dropped below the statutorily required 1.0% of insured shares. Therefore, these credit unions will be invoiced to maintain the 1.0% capitalization deposit. These invoices will amount to $1.5 billion in the aggregate. Invoices will be sent out later this week and deposits will be due in October.

While the equity ratio of the NCUSIF is not formally re-estimated until year-end, this “truing up” will effectively increase the Fund’s equity ratio. In response to a question from Chairman Hood, staff noted that the equity ratio is expected to be at 1.32% at the end of 2020, reflecting the anticipated capitalization deposits, forecasted insured share growth, and equity values. Thus, staff does not anticipate the need to develop a NCUSIF restoration plan, which is required if the equity ratio drops below 1.20%.

Board Member Harper expressed concern given the current equity ratio of the Fund is barely above the statutory mandated threshold to develop and implement a restoration plan. Harper also stated that, in the short-term, the NCUA must be prepared to charge a premium should future events warrant it and credit unions need to be aware of that reality. In the long-term, Harper indicated the need for the agency to begin a discussion with Congress about modifying the way in which the agency manages the NCUSIF.

Board Briefing – Modern Examination and Risk Identification Tool (MERIT) Update

The Board received an update on MERIT, which is part of the agency’s Enterprise Solution Modernization (ESM) Program, a multi-year effort established to manage the modernization effort. The ESM Program includes three key projects:

• Examination & Supervision Solution (ESS): Replace the existing legacy examination system and related supporting systems.
• Data Collection & Sharing (DCS): Define capabilities required for a common platform to securely collect and share financial and non-financial data.
• Enterprise Data Reporting Solution (DRS): Implement business intelligence tools and establish a data framework to enhance analytics and provide more robust data reporting.

Staff discussed the benefits of MERIT, which will be used to manage the examination process, including secure document transfer within the context of an exam (i.e., AIRES replacement).

The roll out of MERIT has been delayed by COVID. There is not a single date for when MERIT will be implemented for credit unions. Staff stated that credit unions will be phased into using MERIT following agency staff training. NCUA will be keep the system apprised of MERIT developments through NCUA.gov as well as a Letter to Credit Unions, expected in 2021.

Bank Secrecy Act: Customer Identification Program Exemption

The Board authorized an order granting an exemption from BSA Customer Identification Program (CIP) requirements for certain loans to facilitate purchases of property and casualty insurance policies (referred to as Premium Financing Arrangements). This is a joint order together with the other federal financial regulators. This order expands a related order issued in September 2018.

Premium Financing Arrangements are typically same-day finance arrangements, where CIP requirements can prove a competitive impediment to financial institutions and a burden to offering such financing with immediacy. In addition, FinCEN has already exempted this type of financing arrangement from Customer Due Diligence and Beneficial Owner requirements, concluding that it represents a very low risk of money laundering or terrorist financing.

Final Rule – Real Estate Appraisals (Part 722)

The Board finalized a recent interim final rule that temporarily allows credit unions to defer appraisals and written estimates of market value for up to 120 days after the closing of a loan. Consistent with the interim rule, the final rule states that credit unions should make best efforts to obtain a credible estimate of the value of real property collateral before closing the loan, and otherwise underwrite loans consistent with safety and soundness principles.

The rule is intended to allow credit unions to expeditiously extend liquidity to creditworthy households and businesses in light of recent strains on the U.S. economy as a result of the pandemic.

The flexibility provided by the rule is scheduled to expire at the end of 2020. In response to a question from Chairman Hood regarding its expiration, staff stated that the agency will work with the other federal financial regulators as we approach year end to determine with an extension is appropriate. The rule is consistent with that provided by the banking regulators.