Expanded CUSO lending, subordinated debt buys by corporates, CAMEL + ‘S’, risk-based capital issues get action by NCUA Board

Three proposed rules, an advance notice of proposed rulemaking (ANPR), and a final rule were issued during Thursday’s open meeting of the National Credit Union Administration (NCUA) Board, with two of the actions addressing yet again requirements related to a risk-based capital rule that isn’t set to take effect until next year.

The last of these actions, issuance of an ANPR on “simplified” risk-based capital requirements, was approved only following, and despite, a lengthy break in the public’s audio access to the board’s open meeting discussion.

Here’s a brief look at Thursday’s board actions:

  • Lending by credit union service organizations (CUSOs): The board, voting 2-1, with Board Member Todd Harper dissenting, issued for a 30-day comment period a proposed rule that would add to the agency’s list of permissible CUSO services the origination of any type of loan that a federal credit union (FCU) may originate. This expands the list of permissible loans by CUSOs from only business loans, consumer mortgage loans, student loans, and credit cards to any type of loan an FCU may originate, including, for example, automobile and small-dollar (payday) loans – the two types NCUA said would likely draw the most new involvement by CUSOs. Harper, noting the NCUA’s lack of direct supervisory authority over CUSOs, lack of economic analysis of the proposal, potential impact on FCU common bond, increased reputational risk and more, opposed the proposal. Harper said such a rule “will create a Wild West within the credit union space,” affording “little accountability for consumer protection” as CUSOs could exceed the restrictions applied to FCU lending in areas such as interest rate, loan term, and repayment.
  • Corporate credit unions’ purchase of subordinated debt: A final rule was approved by the board, which voted 3-0, with an effective date of Jan. 1, 2022. The final rule makes clear that corporate credit unions may purchase subordinated debt instruments issued by natural person credit unions and also specifies the capital treatment of these instruments for corporate credit unions that purchase them. This is one provision of a 2020 corporate proposal that was not included in a final corporate rule approved in October. The board held back on this provision until it completed action on the rule permitting low-income designated credit unions, complex credit unions, and new credit unions to issue subordinated debt for purposes of regulatory capital treatment. Corporates will be required under the final rule to fully deduct subordinated debt instruments from Tier 1 capital, as proposed.
  • CAMELS proposal: The board, voting 3-0, issued proposal for comment on adding an ‘S’ to the CAMEL rating system so the agency’s examination of credit unions includes a specific look at market risk sensitivity. Tandem with this would be a modification in the review of credit union liquidity and asset/liability management, with the “L” in CAMEL (CAMEL also covers Capital, Asset quality, Management, and Earnings) modified to address liquidity risk. The proposal would bring the NCUA’s rating system up to date with a change that banking regulators incorporated decades ago and satisfy a recommendation the agency’s inspector general has been recommending for about the past five years. The proposal has a 60-day public comment period attached.
  • Risk-based net worth, complex threshold: The board voted 2-1 (Harper dissenting) to issue a proposal to raise from $50 million to $500 million the asset threshold for defining a credit union as “complex” for purposes of being subject to any risk-based net worth requirement in part 702 of the NCUA’s regulations. Any risk-based net worth requirement would be applicable to only a federally insured natural-person credit union with quarter-end assets that exceed $500 million and a risk-based net worth requirement that exceeds 6%. This change would remain in place until the risk-based capital rule, which also applies only to institutions exceeding $500 million, goes into effect next year. The NCUA, noting the difficulties posed by the ongoing COVID-19 pandemic, says the proposal is aimed at providing a measure of regulatory relief to further encourage credit unions to ensure access to credit and other services. It says the proposal would provide relief for a “significant number” of credit unions; in all, it is estimated to affect 67 federally insured credit unions, which the agency said represent less than 1% of industry assets. A 30-day public comment period applies.
  • Simplified risk-based capital ANPR: Also with Harper dissenting, the board voted 2-1 to invite comment on an advance notice of proposed rulemaking on two approaches to simplify risk-based capital requirements. The agency contemplates (1) replacing the risk-based capital rule with a risk-based leverage ratio requirement, which would use relevant risk attribute thresholds to determine which complex credit unions would be required to hold additional capital; and (2) retaining the risk-based capital rule (approved in 2015 and revised numerous times, with two delays in effective dates) but enabling eligible complex FICUs to opt-in to a “complex credit union leverage ratio” (CCULR) framework to meet all regulatory capital requirements. The CCULR approach would be modeled on the “community bank leverage ratio” framework implemented under the 2018 economic growth and regulatory relief law. The ANPR is out for a 60-day comment period.

The board also on Thursday approved the agency’s 2021 performance plan and received briefings on the agency’s ACCESS initiative (for “Advancing Communities through Credit, Education, Stability & Support”), statutory adjustments in civil money penalty maximums and the the extension of Central Liquidity Facility (CLF) enhancements in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

CUSO proposed rule notice

Corporate CU final rule notice

CAMELS proposed rule notice

Risk-based net worth and complex threshold proposed rule notice

Simplification of risk-based capital requirements ANPR

Jan. 14 open meeting agenda and links

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