CUToday



August 3, 2015Regulatory Review (2015)Office of General CounselNational Credit Union Administration1775 Duke StreetAlexandria, VA 22314-3428Re:Regulatory Review (2015)Delivered via e-mail: OGCMAIL@To Whom It May Concern: The Credit Union National Association (CUNA) appreciates the opportunity to submit comments concerning the National Credit Union Administration’s (NCUA) Regulatory Review (2015).? CUNA represents America’s credit unions and their more than 100 million members.? CUNA appreciates the NCUA’s efforts to periodically update, clarify, and simplify existing regulations and eliminate redundant and unnecessary provisions.? Nonetheless, the NCUA staff should not use this process for reviewing all of its regulations every three years as a reason to withhold a review or an update to a regulation that is proving problematic to credit unions.? On numerous occasions CUNA, leagues and credit unions have contacted the NCUA staff to inform them that a regulation has become out of date, unnecessary or leading to outcomes for credit unions that may not be intended.? We often are told that the problematic regulation is not up for review or will be up for review in another year and we should address the issue then.While we appreciate the spirit of the annual review, we do not think that it should ever be used as an excuse or reason to delay responsiveness to a known problem with an NCUA regulation.? The NCUA staff try to route important regulatory issues through the review process instead of providing responsive action through immediate analysis and action. Known problems require immediate action after a careful review and not dependence on a process to delay action.? For the review process to work, the NCUA needs to be willing to address issues and problems with regulations as they are brought to the Agency’s attention, because these matters often require more immediate consideration and thus cannot be addressed according to a calendar.? The annual regulatory review should instead be used as on overall review of NCUA regulations, which is useful because it prompts stakeholders to review and comment on regulations that might not be problematic but can be improved, updated or eliminated. Office of General CounselAugust 3, 2015Page TwoFederal Credit Union Bylaws (§701.2) together with the corresponding Appendix Ato Part 701 – Federal Credit Union BylawsThe NCUA should review the requirement that all Federal credit unions utilize a single set of bylaws, regardless of size and complexity.The impetus behind §701.2 arises from Section 1758 (Section 108 of the FCU Act) which states in pertinent part:“Bylaws.—In order to simplify the organization of Federal credit unions the Board shall from time to time cause to be prepared a form of organization certificate and a form of bylaws consistent with this chapter, which shall be used by Federal credit union incorporators, and shall be supplied to them on request. At the time of presenting the organization certificate the incorporators shall also submit proposed bylaws to the Board for its approval.”While we agree this provision directs the NCUA to provide a form of bylaws for use at organization, it does not appear this section requires the NCUA to insist that a credit union continue to utilize the model form for its governance throughout the credit union’s existence. In our view, this “one-size fits all” approach to credit union bylaws is archaic. For example, it may be sufficient for the board of a small credit union to meet every other month as opposed to monthly. The NCUA should provide flexibility to credit unions of varying size and complexity for purposes of their corporate governance. As such, CUNA recommends the following:Issue suggested comprehensive bylaws that can be used by newly chartered Federally Chartered Credit Unions (FCU) to simplify their incorporation and by smaller FCUs to simplify their operations (but these bylaws would not be incorporated by reference into the NCUA regulations). This will satisfy the requirement of the FCU Act;Remove the requirement that every FCU board must follow every provision in the standard bylaws promulgated by the NCUA (or obtain approval for alternative language in specific bylaw provisions); andIssue of list of items that must be in every FCU bylaws because of requirements in the FCU Act or for safety and soundness purposes. This list would be subject to notice-and-comment pursuant to the rulemaking process. Implementation of these recommendations would allow NCUA to move from prescriptive type of requirements to broader principles for purposes of modern corporate governance. Office of General CounselAugust 3, 2015Page ThreeIt further will allow flexibility in corporate governance for each credit union that can be tailored to their size and complexity. As a general principle, CUNA recognizes that the NCUA has the legal authority to enforce federal credit union bylaws, but opposes the NCUA’s enforcement of bylaws that merely address administrative issues. The NCUA should become involved in the enforcement of a federal bylaw only when a bylaw dispute cannot be resolved by the credit union first, using its own internal processes, before turning to the NCUA. If the NCUA must become involved, its actions should be reasonable and no harsher than actions taken by other regulators when addressing similar issues.Loans to Members and Lines of Credit to Members (§701.21)]OREOLike many other financial institutions, credit unions continue to hold a substantial number of other real estate owned (OREO) properties as a consequence of the financial crisis. Under the NCUA’s current policy, FCUs must commit to a plan to actively promote an OREO property for sale and seek a buyer, with the expectation that it will collect on the sale within 12 months. This is true even if the OREO property is being rented. CUNA urges the NCUA to amend its policy regarding renting OREO properties summarized in its December 2008 Letter to Credit Unions (Letter No. 08-CU-25). Specifically, we urge the NCUA to relax its policy that a credit union demonstrate active marketing of an OREO property for sale while the property is being rented. We believe a sound approach would mirror that of the Federal Reserve Board, which issued a Policy Statement April 5, 2012. This Policy Statement required institutions to develop and follow suitable policies and procedures regarding renting OREO properties, while making good-faith efforts to dispose of such properties at the earliest practicable date even if the institution is not “actively” marketing the property for sale. Adopting such a policy for credit unions would give appropriate flexibility given the current housing environment.Executive Compensation (§701.21(c)(8)(i) and related §741.203))NCUA should clarify that senior management can participate in a credit union loan portfolio growth incentive based on overall portfolio growth for a year without violating the provisions of §701.21(c)(8)(i). While we agree with the provisions prohibiting specific compensation for a loan that the credit union approves, overall loan growth is a fundamental purpose of a credit union and an integral part of the business model. Adequate policies, procedures and controls can adequately protect against conflicts that might Office of General CounselAugust 3, 2015Page Fourundermine the integrity of the lending decision. CUNA believes incentives based on overall growth should be permitted under the existing rule but requests NCUA to clarify the distinction by rule. Federal Credit Union Chartering, Field of Membership Modifications, and Conversions (§701.1)CUNA has provided the NCUA extensive field of membership recommendations in previous comment letters which are summarized in this section. Field of membership (FOM) reform is a top issue for CUNA and our member credit unions. CUNA’s federal and state chartered credit union members have expressed concern that the federal charter is falling behind many state charters and thus has become a barrier to the flexibility needed to operate dynamic and efficient cooperative financial institutions. CUNA remains committed to the dual charter system. A summary of our recommendations are as follows:Allow any FCU to serve a combination of contiguous communities and single political jurisdictions (SPJs) that do not exceed in population size or land area of the largest community that the NCUA has already approved which means 10 million people or a land area of 20,000 square miles;Allow any government definition of community to be used as a credit union’s option to define Well-Defined Local Community (WDLC);Increase the population limit used for Core Based Statistical Areas (CBSA) from 2.5 million to 10 million;Eliminate the requirement that a CBSA contain a “core”; Include Combined Statistical Area (CSA) in the definition of WDLC; Expand affinity groups for community chartered credit unions beyond those who live in, worship in, attend school in or work in a community. This should be expanded to include those who work for a business headquartered or are paid from a business located in a community; Redefine “rural district” by eliminating a population test and using a test similar to that of the U.S. Census Bureau as an area that does not contain a majority of land area in an Urbanized Area or Urbanized Cluster;Allow a Congressional district to be considered a WDLC. A Congressional district inherently defines a community with shared interests; Office of General CounselAugust 3, 2015Page FiveReinstate the narrative approach for defining a community;Eliminate the geographic limitation on trade, industry or profession (TIP) for FCUs;Allow a TIP to add vendors and their employees that support the trade, industry or profession;Allow a professional-based TIP to include co-workers who support the professional’s day-to-day delivery of services and to include recipients of the professional’s services when those recipients are not customers or clients;Streamline the paperwork and process to allow groups with 3,000 or more potential members to easily be added to a multiple group FCU;Permit FCUs that convert to a community charter to keep approved groups in their FOMs that are outside the boundaries of their new community; andPermit a state credit union converting to an FCU to keep its current field of membership and expand based on NCUA’s field of membership policies.Loan Participations (§701.22) The NCUA should revise the definition of originating lender in the loan participation rule. It is our understanding that the NCUA has communicated to some credit unions that they cannot participate in indirect auto loans where the dealer is considered the originating lender under §701.22. Furthermore, the NCUA needs to communicate whether this definition represents a policy decision or is an unintended consequence stemming from updated definitions in the September 23, 2013 final loan participation rule.The current definition of originating lender in §701.22 “means the participant with which the borrower initially or originally contracts for a loan and who thereafter or concurrently with the funding of the loan, sells participations to other lenders.” Loan participation is defined as “a loan where one or more eligible organizations participate pursuant to a written agreement with the originating lender and the agreement requires the originating lender’s continuing participation throughout the loan.” This originating lender definition could make a dealer the “originating lender” thus requiring it to be an “eligible organization” for a credit union to participate in an indirect auto loan. In an indirect lending relationship, the dealership generally uses a Retail Installment Sales Contract (RISC). RISCs are distinguishable from direct loans as a dealer does own the RISC until it is purchased by a lender, but does not fund the loan. Lenders respond to a request from the dealer, which includes information about the RISC and the consumer, and Office of General CounselAugust 3, 2015Page Sixpre-approve each RISC consistent with the lender’s underwriting guidelines, including any stipulations which condition the actual funding of the RISC. Should a delivered RISC not meet these conditions, the RISC may be returned to the dealer without funding. Therefore, the only actual funding is performed by the purchasing lender.From a strictly technical sense, the dealer may originate a loan in some of these transactions. Nonetheless, this “origination” is done consistent with a lender’s underwriting guidelines, meaning the dealer is working as an agent of the credit union or other eligible organization by applying their guidelines and selling them the loan soon afterward. We urge the NCUA to update the loan participation rule’s definitions to allow eligible organizations to purchase RISCs from dealers, and not to consider dealers an originator for the purpose of loan participations.Services for Nonmembers within the Field of Membership (§701.30)Before the passage of §701.30, credit unions that charged a fee for cashing on-us checks risked liability under the Uniform Commercial Code (UCC) for wrongful dishonor. However, §701.30(b) preempts state UCC laws and protects FCUs from liability for wrongful dishonor if they charge fees to nonmembers in the field of membership for cashing on-us checks. On the other hand, charging fees to cash checks for nonmembers not in the field of membership is not covered by §701.30. So cashing on-us checks for a fee for these nonmembers would open FCUs to liability under the UCC for wrongful dishonor since there is no federal preemption. Any FCU deciding to charge fees for cashing checks pursuant to §701.30(b) should implement procedures for accurately and quickly determining whether the nonmember attempting to cash an on-us or third party check is within the field of membership. We recommend the NCUA adjust the rule to preempt liability for cashing on-us checks to nonmembers.Designation of Low-Income Status; Acceptance of Secondary Capital Accounts by Low-Income Designated Credit Unions (§701.34)We appreciate the NCUA’s efforts over the last several years to help identify credit unions that qualify for the low-income designation and the agency’s encouragement for the credit unions to accept the low-income designation. CUNA commented extensively on the low-income designation in the field of membership recommendations provided to the NCUA. We continue to hear that credit union that have accepted the designation have been hesitant to take full advantage of its authorities for fear that market fluctuations and other factors out of their control may disqualify them, necessitating them to unwind additional business lending or supplemental capital offerings. Office of General CounselAugust 3, 2015Page SevenCUNA urges the NCUA to aggressively review the low-income designation to provide a path for additional credit unions to qualify, to provide greater transparency with respect to the qualification thresholds and to enhance certainty that if a credit union drops temporarily below a threshold that it will not have to immediately begin an unwinding process that could result in the credit union pulling back services to members and, potentially, laying off staff. The Federal Credit Union Act (FCUA) gives the NCUA Board extensive authority to define “low-income” for exemptions to the FCUA’s limitations on accepting non-members’ deposits, member business loan limits and access to supplemental capital. NCUA recognizes the operational advantages of a low-income credit union designation (LICU) as demonstrated by the agency’s outreach efforts to ensure that eligible credit unions are aware they may qualify for designation as “low-income.” CUNA urges the NCUA to exercise its statutory authority to the fullest extent possible in defining “credit unions serving predominantly low-income members.” LICUs operate with expanded powers that are not available to non-LICU credit unions. These expanded powers represent real regulatory relief, and thus enable credit unions with these powers to better serve their members.The NCUA could adopt methods for credit unions to qualify as low-income beyond the current statistical approach. These include a narrative approach where credit unions could describe why they should be given a low-income designation without statistical analysis. Low-income designation could also be extended to credit unions that historically serve low-income communities, certify a mission to serve low-income people, or tailor products and services specifically to people that are low-income. The NCUA has wide latitude in designating a credit union as a LICU. CUNA specifically suggests that credit unions who qualify as a Community Development Financial Institution (CDFI) be automatically considered a LICU. CDFIs prove their dedication to low income individuals by serving a target market that meets many of the same criteria as a LICU area. Credit unions are concerned about crossing the threshold once they start to operate as a LICU and develop a business dependent on a LICU’s expanded powers. Some credit unions that have received LICU status have noted they do not understand how they qualified and how closely they operate to the qualification threshold. It is difficult for them to manage to the threshold if they do not understand the process. We urge the NCUA to bring greater transparency to the qualification matrix to assist LICU credit unions in identifying eligibility and maintaining the status. Office of General CounselAugust 3, 2015Page EightLICU credit unions should not fear that rule changes, growth or changes to their fields of membership could impact their LICU status. One reason credit unions eligible for LICU status give for not accepting the status is that the five-year wind down requirement is far too short. They cannot justify establishing a business lending program if they fear they will have to wind it down in five years’ time because the credit union drops below the qualifying threshold. We urge the NCUA to bring greater certainty to the LICU status by making the LICU designation permanent.Prompt Corrective Action (§702)CUNA provided the NCUA with a comment letter on the second proposed risk-based capital rule (RBC2) detailing improvements to make the rule feasible for credit unions without damaging the credit union industry and reducing members’ access to financial services. While we appreciate the significant improvements that the NCUA has made to the RBC2, we continue to question whether the NCUA has the statutory authority to set a risk-based standard for determining whether a credit union is well-capitalized, as opposed to adequately capitalized, and we also question whether the cost of implementing the proposal outweighs the benefit to the National Credit Union Share Insurance Fund (NCUSIF). CUNA still believes this proposal is a solution to solve a problem that does not exist in the credit union system. First and foremost, the capital adequacy requirement should be eliminated. This provision could be among the most problematic for credit unions in RBC2 because it would grant examiners considerable latitude to determine whether a credit union needs more capital - even if it meets the regulatory requirement of being well-capitalized according to standard net worth and risk-based capital ratio requirements. The boards of directors and executives running credit unions need certainty in this area not unpredictable, subjective requirements set by examiners. In addition, as part of its RBC2 proposal, the NCUA provided an advance notice that it intends to consider a new proposal related to interest rate risk. We question whether a new rule on interest rate risk is necessary considering the NCUA presently has many supervisory tools that could be used to identify unreasonable interest rate risk at individual credit unions. Therefore, CUNA urges the NCUA to withdraw RBC2. In lieu of withdrawal, the NCUA could improve RBC2 by fixing risk weightings, applying the rule only to adequately capitalized credit unions, as required by the Federal Credit Union Act (FCUA), removing subjective capital adequacy requirements and allowing supplemental capital to be used for RBC purposes. Office of General CounselAugust 3, 2015Page NineInvestment and Deposit Activities (§703)The NCUA has recently indicated its intent to revise its rule on supplemental capital. As part and parcel of such a review, the NCUA should revisit its policy prohibiting charging a periodic membership fee. Clearly, this fee could be utilized as part of any supplemental capital solution. If not part of a supplemental capital solution, the NCUA could clearly utilize the authority under Section 721 as an “incidental power.” The NCUA has interpreted the incidental powers authority in the Act to allow numerous items listed as “incidental” activities. Allowing an FCU to charge a periodic fee would be consistent with those activities and could further be useful in addressing supplemental capital. We urge the NCUA to look at adding this authority for credit unions. Truth in Savings (§707)Credit unions have raised concerns regarding §707’s use of “average percentage yield earned” (APYE) in statement and account disclosures. In particular, we ask the NCUA to consider eliminating the provision in §707.5 that requires subsequent disclosures for certificates to be provided to the member 30 days in advance, because we believe this is overly burdensome to the credit union and of little or no utility to the member.Mergers and Conversions (§708)Although the NCUA has taken steps to provide greater transparency and allow for greater participation by credit unions during an involuntary merger, some credit unions continue to express frustration in not being considered as a target when the NCUA is dealing with a troubled credit union. In particular, there is a concern the NCUA continues to be too selective in terms of designating a credit union to take over a problem credit union. Some feel that credit unions that are more local to a troubled credit union are often overlooked or ignored. Credit unions also express that sometimes it is difficult for them or their representatives to obtain information from the NCUA regarding the status of their applications for a conversion, merger or membership expansion. We urge the NCUA to review their processes and provide more clarity to credit unions on timelines and contacts for such applications. Furthermore, credit unions should be permitted to designate appropriate representatives, including state credit union leagues, to work with the NCUA on issues regarding a credit union’s application.Finally, in 2010, the NCUA promulgated new requirements in §708 for credit union mergers. Part of the rule required a credit union to disclose any “merger-related financial arrangement” (§708b.2) that a person might receive in connection with a merger transaction. A material increase was defined as an increase that exceeds the greater of 15 percent or $10,000. While CUNA supports full disclosure of material terms for insiders, Office of General CounselAugust 3, 2015Page Tenwe also believe the NCUA should revisit the de minimis amount set by rule as the amount has not been adjusted in some time. It is particularly prescient in the situation where a small credit union is merging into a large credit union. A modest increase may trigger disclosure, but in fact the increase has little relevancy or there is no need for additional disclosure in light of the transaction. We urge the NCUA to revisit the de minimis figure and update it for the current economic times.Thank you for the opportunity to express these views to the NCUA. If you have further questions or would like to discuss CUNA’s comments in more detail, please feel free to contact me at 202-508-3630.Sincerely,Andrew T. PriceSenior Director of Advocacy & Counselaprice@cuna.coop ................
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