Proposed Rule – Capitalization of Interest (Part 741, Appendix B)

The Board issued a proposed rule to allow the capitalization of interest in connection with loan workouts and modifications. The proposal would remove the current prohibition on capitalizing interest, which according to the agency “may be overly burdensome and, in some cases, hamper a federally insured credit union’s good-faith efforts to engage in loan workouts with borrowers facing difficulty because of the economic disruption that the COVID-19 event has caused.”

The proposed change would apply to workouts of all types of member loans, including commercial and business loans.

Staff explained how the proposed rule would include certain consumer protections, such as requiring credit unions to determine the borrower’s ability to repay the debt prior to capitalizing interest on the member’s loan.

CUNA has called on the agency on several occasions, including in a September letter, to allow for the capitalization of interest.

The agency will accept public comments on the proposal for 60 days following publication in the Federal Register.  Summary here

Board Briefing – State of Credit Union Diversity and 2019 Diversity Self-Assessment

The Board received a briefing on the state of credit union diversity, equity, and inclusion. Staff discussed the annual voluntary diversity self-assessment, which is critical to collecting information on credit union diversity. Staff stressed that data is reported only in the aggregate to the Board, that no credit unions are identified, and that results have no bearing on a credit union’s examination.

Staff then discussed the results of the 2019 diversity self-assessment, which was completed by 118 credit unions, up from 35 in 2016. Staff is encouraged by the increase in participation and expects more credit unions to complete the assessment going forward.

In response to a question from Board Member Harper on how the agency can increase participation in the assessment, staff said they may explore use of a third-party to collect the data to address a lack of trust among the industry; staff also reiterated the idea that the agency could pursue a reduction in the operating fee for federal credit unions that participate. In a recent letter to the NCUA, CUNA stressed the importance that not only must the assessment remain voluntary but any possible discount for participating credit unions must be available to federal and state-chartered credit unions alike.

Board Briefing – 2020 Budget Update and Reprogramming

The Board was provided an update on the 2020 agency budget.

Staff anticipates that of the $27.4 million allocated for travel in the 2020 budget, at least $18 million will be left unspent due to a reduction in travel. Staff recommended reallocating $4.32 million for COVID-related costs and opportunities, leaving the surplus at $14.7 million. The bulk of the reallocation ($3 million) would be used for renovations to the agency’s central office; thus, allowing the $3 million planned for the 2021 Capital Budget to be eliminated.

While the Board agreed to reprogramming of part of the 2020 budget, Board Members Harper and McWatters expressed concern with the 2021-2022 budget and indicted they are unlikely to support it as proposed.

Board Briefing – Share Insurance Fund Quarterly Report

Today’s report on the Share Insurance Fund showed total income of $69.3 million and net loss of $26.1 million for the quarter ending 9/30/2020. The balance sheet indicated total liabilities and net position of $19.213 billion, an increase of roughly $1.5 billion from the previous quarter. The Fund’s reserve balance stands at $175.2 million as of the end of the third quarter, with $15.5 million being for specific reserves. The number of CAMEL Code 4/5 credit unions decreased slightly from the preceding quarter to 163; CAMEL Code 3 credit unions also decreased slightly to 767. The Fund’s equity ratio stands at 1.22% as of June 30, below the Normal Operating Level of 1.38%.

In regard to the Share Insurance Fund “true up” announced at last month’s Board meeting, staff noted that as of yesterday, 99.6% of the amount invoiced has been collected.

Board Member Harper reiterated comments he has made previously that, with the Fund’s equity ratio continuing to decline, it is not a question of if a premium will be charged but when, whether next year, the following year, or sometime beyond that. He warned credit unions that they need to brace themselves for that reality.

Further, Board Member Harper reiterated his call for the agency to begin discussions with Congress to find a way for the NCUA to manage the Fund going forward in a manner that permits the Fund to be built up in good times rather than during times of stress.