Posts tagged ‘NCUA’

Key Risk Based Capital Requirements to Be Proposed Next Thursday

I have some potentially good news for credit unions with $500 million or more in assets.

As readers of this blog already know, starting on January 1st credit unions over this threshold must start complying with risk based capital requirements intended to ensure that NCUA appropriately accounts for the capital risks of complex credit unions under its PCA framework. Up until May, the NCUA was receiving feedback from credit unions on how this requirement might be modified. Remember, not one of the three board members currently serving at NCUA was even around when this new framework was put in place way back in 2016.

Under a risk based capital framework, financial products are given risk weights. So for example, a credit union holding a disproportionate number of 30 year mortgages would have a different risk rating than a credit union with the same level of assets that specializes in car loans. We will know by next Thursday what approach NCUA has decided to take when it comes to simplifying these new capital requirements. One approach would implement a risk based leverage ratio framework. Very generally, this framework would establish certain risk factors that would trigger additional capital buffer requirements. A second approach would implement a so-called complex credit union leverage ratio. Again, very generally speaking this approach would allow credit unions to satisfy risk based capital requirements by putting aside a greater amount of capital than would otherwise be necessary under NCUA’s existing risk based capital framework.  Credit unions would be able to opt in and out of this framework.

Irrespective of what approach NCUA decides to take it is time to give impacted credit unions a clear compliance framework. There is much work to be finalized in the coming months. NCUA is cutting this closer than a college kid who put off his big term paper to a day before the quarter ended. On that note, enjoy your weekend.

July 16, 2021 at 9:25 am Leave a comment

Is the Fed Squeezing Small Lenders Out of Existence?

Good Morning, folks.

In the 1930’s the Federal Government responded to the collapse of the farming industry by putting in place a government back framework meant to stabilize the farming industry and stem the impact it was having on everyday Americans. Today, the family farm is largely a relic of a bygone era but the government subsidies designed to keep it alive are still alive and well and disproportionately benefiting larger corporations that don’t need the money.

Many of the same trends are taking hold in the banking industry to the detriment of credit unions.

I’m not going out on much of a limb here to say that you should expect your credit union to have to pay more into the Share Insurance Fund in approximately six months. That’s my takeaway from NCUA’s report on the Share Insurance Fund provided at yesterday’s monthly board meeting. It is also the assessment of one Todd Harper who put credit unions on notice that “absent some unknown external event, these forces seem likely to eventually” push the equity ratio below the 1.20 level at which point NCUA must pass around the Share Insurance Hat.

This unfortunate development isn’t all that surprising. This past week many New York credit unions have had the opportunity to listen to Steve Ricks pithy overview of current credit unions economic trends. Members are stocking away savings at unprecedented levels thanks to all of that government stimulus spending. The bad news is that loan demand isn’t keeping pace and investment returns are non-existent. Put this all together and you have the profits of many credit unions, particularly smaller ones, being squeezed even more than they have been in the past. Perhaps as the economy picks up even more, so will loan demand. We will have to wait and see.

But let’s take a look at the big picture. The trend we are seeing is nothing more than the continuation of forces put in place by the Federal Reserve more than a decade ago. When the mortgage meltdown looked as if it might trigger a depression, even Janet Yellen explained that, while she was empathetic to the difficulties faced by community banks, the economy as a whole benefitted from the stimulus resulting from historically low interest rates.

At the time this argument made sense. But by continuing to take extraordinary steps to suppress interest rates, the Fed’s intervention is feeling more like a permanent lifeline to large banks then a short-term necessity. As someone who believes in the free market this doesn’t feel like a fair competition.

May 21, 2021 at 12:48 pm Leave a comment

Untangling the Mortgage Mess

In the immortal words of William Shakespeare “Oh, what a tangled web we weave when we try to mess up the regulatory agenda of the incoming administration”. 

Over the last few months yours truly has been hesitant to talk too much about changes to the Qualified Mortgage regulations since the rules are as likely to take effect as Joe Biden is to be endorsed by a coal miner union.  But, those of you who originate mortgages for sale to the GSEs are experiencing one of the most confusing periods of regulatory uncertainty in more than a decade.  It is beginning to have some real consequences.  Here is some background. 

Dodd-Frank mandated that the CFPB promulgate regulations defining a Qualified Mortgage. As readers of this blog also know, Dodd-Frank also stipulated that mortgages purchased by Fannie Mae and Freddie Mac would also qualify for Qualified Mortgage protections.  This exemption was only expected to last as long as Congress figured out what to do with the GSEs, or January 10, 2021.  The CFPB finalized regulations late last year eliminating the QM patch and amending the general QM regulations.  Under these new regulations qualified mortgage designation would be determined based on a mortgage’s APOR.  The Bureau issued a final rule to amend the General QM definition in December of 2020. This rule took effect on March 1, 2021 and has a mandatory compliance date of July 1, 2021. 

To the surprise of absolutely no one, the new leadership at the CFPB announced that it was considering making changes to the revised QM definition.  It has proposed extending the compliance deadline until 2022.  In the ensuing months it will undoubtedly be coming up with a new QM definition. 

But here is where the deal gets even more complicated.   Remember back in 2008 when the federal government had to bail out Fannie and Freddie for fear of triggering a Great Depression?  As part of that bailout, a conservatorship was created for the GSEs and since that time the Treasury has imposed contractual obligations on the GSEs in return for the hundreds of billions of dollars they received from the American tax payer.  (We don’t like using this term in America, but Fannie and Freddie have been nationalized.)  This agreement was recently amended.  Under this agreement, as things currently stand, the GSEs are obligated to begin implementing the new APOR standard on July 1st.  This means that even though the CFPB has already signaled its intention to reconsider the new QM definition, lenders that work with the GSEs have to start preparing new policies and procedures for the July 1st deadline.

Against this sordid backdrop, CUNA yesterday issued this letter urging the Treasury to promptly remedy this situation.  As CUNA noted, forcing the GSEs to implement these changes “would be unnecessary, wasteful, and ultimately harmful for consumers as the implementation cost may also increase the cost of credit.”

It is hard to underestimate the man hours involved in preparing for these types of major changes.   

Let’s hope this glitch gets resolved quickly before all of this confusion begins to have practical consequences. 

NCUA Meeting Recap

Here is NCUA’s recap of yesterday’s Board meeting.  Remember that the Board already approved the interim regulations giving credit unions greater PCA flexibility.

On that note, enjoy your weekend.  Let’s hope it gets warmer. 

April 23, 2021 at 10:28 am Leave a comment

Is Your CU Eligible For ECIP?

On Thursday the Treasury unveiled regulations and guidance implementing the Emergency Capital Investment Program (ECIP) which sets aside $9B to invest in Community Development Financial Institutions (CDFI’s) and Minority Depository Institutions (MDI’s) which can use the money to assist communities negatively impacted by the pandemic.  It has created a lot of interest in CU Land because of its extremely attractive terms.  Funds provided to CUs under the program are interest free for the first 24 months. The program however is trickier than it appears, particularly as it relates to secondary capital.

 To be eligible for funding, your credit union must be either a CDFI or a MDI.  This means that even if your credit union has become a Low Income Credit Union (LICU) it does not qualify to participate for these loans.

Congress created the program in the second round of stimulus funding in December. Under Section 104A the program was created   

“…to support the efforts of low- and moderate-income community financial institutions to, among other things, provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers, especially in low-income and underserved communities, including persistent poverty counties, that may be disproportionately impacted by the economic effects of the COVID-19 pandemic, by providing direct and indirect capital investments in low- and moderate-income community financial institutions.”

With this charge it is still not entirely clear how the treasury will decide how much $ eligible FIs will be awarded.

Here is where I will get a little into the weeds.  If a credit union does qualify for funding under the program your credit union will still have to be eligible for and be approved by NCUA to have the funds classified as Secondary Capital.  Otherwise it will reduce your net worth ratio.  These funds are not being set aside for financially struggling institutions they are being set aside for financial institutions in financially struggling communities.  

What regulations apply in making a secondary capital classification request?  Good question.  As readers of this blog know NCUA has approved regulations basically replacing secondary capital with subordinated debt.  However, these new regulations don’t become effective until next year.  Credit unions should follow the existing secondary capital regulations, paying special attention to this detailed and, in my ever-so-humble opinion, overly burdensome guidance on secondary capital.

Vaccine Eligibility Expansion

As you may have heard, and judging by the number of emails on the subject, many of you did, the Governor announced yesterday that vaccine eligibility would be expanded to include:

  • Public-facing government and public employees
  • Not-for-profit workers who provide public-facing services to New Yorkers in need
  • Essential in-person public-facing building service workers

At this point we are just dealing with a press release.  The Association has reached out for clarification on precisely which employees are going to be included in this expansion and once we get additional information we will pass it on.   

March 10, 2021 at 9:08 am Leave a comment

Four Key Issues to Know As You Start Your Credit Union Day

This morning has provided your faithful blogger with a treasure trove of important tidbits to pass on to you as you begin your credit union day. So with the caveat that many of these issues are worthy of future expansion, here goes…

Wells Fargo Folds and Settles Patent Litigation

In one of the highest-profile patent litigation cases in more than a decade, according to Law360, Wells Fargo has agreed to pay $300 million to USAA to settle claims that it violated patents related to remote deposit capture technology. The litigation was seen as a key bellwether of the extent to which financial institutions would have to enter into licensing agreements regarding this technology. Yours truly is no patent attorney, but this announcement should trigger a call to your legal counsel to discuss next steps for your credit union, particularly if it has been subject to a letter from USAA requesting that it license its RDC technology. 

Biden Administration Announces Additional Mortgage Forbearances

The Biden Administration announced yesterday that it was extending mortgage forbearance opportunities for certain government-backed mortgage loans. As a result of the announcement, the Department of Housing and Urban Development, the VA and the Department of Agriculture will extend mortgage forbearance and foreclosure relief, which were otherwise due to expire in March, until June 30th of 2021. Similar steps were recently announced by Fannie Mae and Freddie Mac. New York State has also extended forbearances for non-federally backed mortgage loans for individuals impacted by COVID-19. Let’s hope that the additional stimulus that Congress is expected to provide to consumers will allow policymakers to phase out these protections by the end of this year. Believe it or not, a properly functioning mortgage lending system is in the best interest of consumers.

New York’s Department of Financial Services Issues Cybersecurity Fraud Alert

The DFS issued a cybersecurity fraud alert informing its regulated entities that it has “recently learned of an aggressive campaign to exploit cybersecurity flaws in public facing websites to steal non-public information.” Although the guidance primarily focuses on websites designed to give consumers quick insurance quotes, the DFS is also reporting that similar attacks have been lobbed against mortgage companies. The focus of these threats is apparently to steal information such as licenses, which consumers are sometimes asked to provide when getting instant quote information. DFS is reporting that at least some of the stolen information is being used to engage in fraudulent attempts to obtain pandemic-related unemployment benefits in New York. Remember, under New York’s cybersecurity regulation (NYCRR 500.1 (g)), information that is considered “non-public” includes a name, number, personal mark or other identifier which can be used in conjunction with a social security number, drivers license, account, credit or debit card number in identifying an individual. Incidentally, you should pass this on to your vender to make sure they are aware of your New York State-based obligations. 

NCUA IG Investigates Consumer Complaint Process

As many readers of this blog know, Board Chairman Todd Harper supports increasing NCUA’s scrutiny of credit union compliance with consumer protection laws. Many individuals, including your faithful blogger, have questioned what evidence there is that compliance with consumer protection laws is lacking within the industry. An esoteric report recently issued by the inspector general investigating NCUA’s complaint review process may take on exaggerated importance in this debate. I haven’t read the entire report yet, but the inspector general is suggesting that NCUA should do a better job of making sure that examiners are aware of complaints issued against a credit union. 

On that note, enjoy your day. I would also like to extend a special thank you to the Buffalo Sabres. Two nights ago, my NY Islanders did not surrender a single shot on goal to the Sabres. This was the first time the Islanders had ever shut a team out this way since they started in the early 70s. In the immortal words of Wayne Gretzky, “you miss 100% of the shots you don’t take.”

Image result for michael scott wayne gretzky

February 17, 2021 at 10:02 am Leave a comment

SBA Provides Workaround For Platform Glitches

If you are among the financial institutions that are providing PPP loans, I have some good news for you. Although the rollout of the program following its reauthorization by Congress in December has gone relatively well, it has not been without its glitches. Incidentally, I belong in the group of people who believe the SBA has done a good job administering a program doling out billions of dollars within weeks of Congressional approval. 

Under the procedural notice, lenders will be allowed to certify that a loan meets SBA requirements notwithstanding the fact that it has been flagged for rejection by the SBA platform. The updated guidance provides a list of error codes to which this flexibility will apply, such as a potential match to the OFAC sanction list, or a tax ID mismatch. The guidance explains that when a lender resolves a compliance error through this lender certification process, the lender must submit all information and documentation supporting the certification to the SBA when the lender submits a forgiveness decision or guarantee purchase request. As a result, keep in mind that the certification override is an option – not a requirement – for lenders. The guidance also points out that not all platform red flags can be resolved through this process, and provides a list of examples of the type of documentation which lenders could provide to the SBA to resolve these issues as quickly as possible. 

While we are on the subject of the PPP, today’s American Banker is reporting that more than $93 billion of the roughly $101 billion worth of loans approved by the SBA since January 12th have involved second-draw loans. I was talking to an accountant friend the other day, and as he noted, either you are comfortable relying on the government, or you simply don’t trust it enough to take it in the first place. 

Setting the Record Straight When it Comes to FOM Proposal

When I started blogging oh-so-many years ago, I quickly decided to ignore the white noise of banker attacks as much as possible. After all, there’s only so much you can say on the same topic, and when it comes to dealing with the inevitable attacks, the industry has to be able to walk and chew gum at the same time. But, I’m more than a little amused this morning by the banking industry’s reaction to a common-sense proposal by the NCUA. 

Under existing regulations, only multiple common-bond credit unions that qualify as investors in a shared branching network, such as New York’s USNet, can use the branches in that network to satisfy physical facility requirements. Mere participants in such a network cannot. This distinction is of course arbitrary, since any credit union which contracts to participate in a shared branching network is making a legal commitment to helping other participating credit unions and their members, regardless of their status as an investor in the network. In fact, the existing regulation simply makes it more difficult for smaller credit unions to fully realize the benefits of shared branching. In other words, this is the latest example of how banker opposition hurts consumers by minimizing the potential financial options that could be made available to them. I strongly suspect that the banker’s hyperbole is motivated by a desire to signal their concern to steps that NCUA may take to further expand field of membership flexibility in the aftermath of the decision by DC’s court of appeals to uphold NCUA’s field of membership improvements. 

Sounds like it’s time to get the lawyers and money ready to go. Personally, I can’t wait.

February 11, 2021 at 9:46 am Leave a comment

What’s Old is New Again – BSA Takes Center Stage

Let’s face it – these are heady days for cyber criminals. Crypto currencies provide an ideal means to facilitate illicit payments, an unprecedented number of people are working from home, the worldwide economic slowdown ensures a steady supply of potential fraudsters, particularly in countries that look the other way at this type of crime, and you have the US government throwing unprecedented amounts of money to consumers in as quick a way as possible. Put this all together and, in my ever so humble opinion, (at least in the short term) your credit union has to dedicate more of its compliance resources to ensure it is taking the steps necessary to detect and react to nefarious cyber activities, i.e. the “red flags” of criminal activity. 

Recently, there has been a sharp increase in the number of advisories of which your credit unions should be aware. With regard to PPP loans, FinCEN recently sent updated guidance reiterating your due diligence requirements and confirming what procedures can be used when assisting individuals applying for “second draw” PPP loans. This guidance is particularly useful for navigating your beneficial owner obligations. Remember that the PPP loan application requires you to identify any owner with a 20 percent stake in an applicant’s business, whereas FinCEN’s beneficial owner requirements kick in for individuals with a 25 percent stake. 

Just yesterday, FinCEN issued this guidance providing examples of how fraudsters are gaming the system to facilitate healthcare fraud. One of the examples it provided involved an individual who set up several shell pharmaceutical companies to get reimbursement for transactions that never took place. It looks like somebody better call Saul (for the uninformed, that is a Breaking Bad reference). 

The Anti-Money Laundering Act of 2020 contained in the National Defense Authorization Act ordered FinCEN to provide guidance to financial institutions that are asked by law enforcement to keep an account open, even though they suspect or know that it is being used to facilitate criminal activities. The statute provides that financial institutions honoring such “keep open requests” shall not be liable for maintaining the account. This guidance, which was issued jointly by all the federal financial regulators, including the NCUA, implements this language. Finally, I want to remind you all of the guidance issued in October related to financial institutions that facilitate ransomware payments. Statistically speaking, there is a very good chance that many of your credit unions will either facilitate a ransomware payment, or be victimized by a ransomware attack. As I explained in this blog from the fall, OFAC is reminding third parties like insurance companies, banks and credit unions that they could find themselves subject to strict liability penalties for facilitating these payments if they are going to individuals on the OFAC list. While yours truly continues to believe that this is a woefully misguided warning, you should all have contingency plans for dealing with a ransomware scenario, and be cognizant of its potential OFAC implications.

February 3, 2021 at 9:26 am Leave a comment

How Big a Difference Does “S” Make?

That’s the big question I’m pondering this morning after delving into the proposal by the NCUA Board to amend the erstwhile CAMEL examination system to include a separate category dedicated exclusively to sensitivity to market risk. Is this long overdue change little more than semantics, or somewhere in between? 

The current CAMEL framework stands for – how many of you know the answer before I tell you – Capital Adequacy, Asset quality, Management, Earnings and Liquidity. In contrast, for more than two decades now, the other national bank regulators in many states use CAMELS, which separately evaluates Sensitivity to market risk. The purpose of this S is to ensure examiners independently evaluate interest rate risk. In the preamble to its proposal, NCUA notes that credit unions have become more sophisticated since they decided not to expand the examination framework in 1997. For example, in those pre-millennial days, mortgages accounted for only 19 percent of the industry’s total assets, which has grown to 42 percent as of September 2020. In addition, the call for this extra category has been made over several years, with former board chairman Rick Metsger championing the idea. When NCUA was devising its initial risk-based capital framework for complex credit unions, one of the industry’s criticisms was that interest rate sensitivity is best accounted for by examiner evaluation as opposed to being baked into the asset ratings that were proposed by the NCUA. So on the one hand this proposal is, if anything, overdue.  

But, is it really necessary? For one thing, NCUA already accounts for a credit union’s sensitivity to interest rate fluctuations. As NCUA made clear in this 2000 letter to credit unions detailing the CAMEL rating system, the existing liquidity category includes an assessment of the credit union’s monitoring and control of interest rate sensitivity and exposure. In addition, credit unions with $50 million or more in assets are required to have an interest rate risk policy.

All of which leads me back to where I started. Of course a sophisticated industry of depository institutions needs to assess its exposure to interest rate changes. But if all goes according to plan, this update to the CAMEL system will not have much of an impact on your credit union. 

February 1, 2021 at 9:38 am Leave a comment

Like it or Not, CUs must Engage in the Climate Change Debate

Good morning, folks.

First, I want to assure you that the purpose of today’s blog is not to debate the science of climate change, or to suggest where I think it should be on the list of concerns considered by your executive team as it tries to position your credit union operations for the months and years ahead. The purpose of this blog is instead to inform you that, with yesterday’s announcement of executive orders calling for a government-wide approach to climate change, the industry at large as well as your individual credit union has become part of a discussion. It’s not if your credit union is going to take steps to mitigate the impact of climate change – but what those steps are going to be when regulators come knocking.

In reviewing yesterday’s executive order, the President didn’t specifically mention banking initiatives, but by including the Treasury Department and the HUD Secretary on the task force and emphasizing the relationship between economic justice and climate change initiatives, there’s little doubt that financial institutions will be asked to play a role in mitigating the effects of climate change. Plus, even though NCUA is an independent agency, there’s nothing to stop it from voluntarily working with the Biden administration on these issues and efforts. 

New York State’s Department of Financial Services has been at the forefront of this debate. In October, it issued this guidance making the argument for financial institutions to take an active role in integrating climate change considerations into their operations. It pointed out, for example, that extreme storms could have a disproportionately negative impact on regional and community banks which provided mortgages in impacted areas. On a more nebulous note, it argued that the transition away from a carbon-based economy will over time impact the underlying value of assets. DFS also issued specific expectations for the institutions it regulates. These include that they “start integrating the financial risks from climate change into their governance frameworks, risk management processes, and business strategies,” as well as to “start developing their approach to climate-related financial risk disclosure.” New York’s Superintendent Lacewell has recently highlighted the importance of this initiative. 

I know how much work all of you already have on your plate, and I also know that this has become one of those issues that can end a dinner party quicker than one hurricane can put a significant portion of Long Island underwater. But the sooner we lay out how we’re going to do our part, the better positioned we will be to prevent overly cumbersome, one-size-fits-all mandates.

January 28, 2021 at 9:49 am Leave a comment

New York to LIBOR’s Rescue!

The rulers of the financial world typically frown on the state getting involved with their business. But when it comes to LIBOR, you can hear a huge sigh of relief emanating from Wall Street this morning. As readers of this blog know, LIBOR is a discredited benchmark that has been the gold standard for contracts that use indexes. In the credit union world, LIBOR has been used by some for adjustable rate loans, and in the world of high finance, it has been used for complicated derivatives. 

Despite the fact that readers of this blog have known for years that LIBOR would come to an end, perhaps as early as this year, apparently some of the folks on Wall Street haven’t gotten around to adjusting to this new reality. But they’re in luck, because tucked away in the Governor’s Article VII budget language is a provision which will amend New York State law to ensure the continued validity of contracts that rely on LIBOR adjustments even after it is obsolete. Since so many financial contracts are executed in New York, this news benefits the financial industry at large. 

Has the CU Industry Been Impacted by the Russian Cyber Attacks?

Since at least last March, the Russian government has engaged in the most comprehensive series of cyber attacks in the internet era. The attacks, which may still be ongoing – the scope of which is still being determined – raised the very real prospect that a foreign government hostile to the United States has infiltrated the inner workings not only of corporations, but of financial institutions as well. Unfortunately, despite a letter from CUNA on the potential scale of the problem, the NCUA has done little to inform credit unions about the extent to which NCUA itself may have been victimized and the steps credit unions should take to protect member data.

As Michael Ogden succinctly put it in this CU Times piece

“We do not know if the NCUA has been impacted. We do not know if the NCUA is conducting its own investigation or audit of its network systems. We do know the Treasury Department, the Commerce Department, the State Department, the Pentagon and the Energy Department have all been compromised. We do know from reports that other federal regulatory agencies have also been compromised.”

This is one of those situations where what you don’t know can hurt you. It’s time for some clarification from our regulator.

January 21, 2021 at 9:34 am Leave a comment

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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