on 8:54 AM

 CUNA supports NCUA’s proposed current expected credit loss (CECL) transition methodology, it wrote to the agency Monday. CUNA also strongly supports the proposal’s effective exemption of credit unions with less than $10 million in assets from CECL.  

CECL is a new accounting standard that recognizes lifetime expected credit losses. CUNA has maintained that it is inappropriate for credit unions and will present capital and compliance challenges.

Upon adoption of CECL an institution will record a cumulative-effect adjustment to retained earnings. CUNA believes credit unions will likely experience a (potentially sharp) increase in expected credit losses on the effective date as a result of the day-one adjustment, which could lower prompt corrective action (PCA) classification.

Credit unions are required to comply with CECL for fiscal years beginning after Dec. 15, 2022. NCUA’s proposal would provide that, for the purposes of net worth classification, the agency will phase in over a three-year period the day-one capital effects of CECL.

“A phase-in will alleviate the impact of the day-one adjustment but will not change the overall impact the new accounting methodology will have on credit unions. With that said, we believe a three-year phase-in is appropriate,” CUNA’s letter reads. “Not only does it conform with the flexibility provided by the federal banking agencies, it also provides a sufficient amount of time for credit unions to spread out the effect of the day-one adjustment.”

NCUA’s proposal also exercises its statutory authority under the Federal Credit Union Act to no longer require that credit unions with under $10 million in assets make changes for loan losses. Instead those credit union would be allowed to make such charges under any reasonable reserve methodology (including the current “incurred loss” approach), as long as it adequately covers loan losses.

 “NCUA using its statutory authority to exclude the smallest FICUs from the costly—initial and ongoing—expenses required to comply with CECL is critical,” the letter reads. “While these challenges are not unique to only the smallest FICUs, we recognize the GAAP-exemption threshold of $10 million is explicitly stated in the FCU Act, prohibiting the NCUA from exempting from GAAP credit unions at or above $10 million in assets.”

CUNA’s letter requests NCUA determine whether a credit union that meets $10 million in assets after the CECL effective date is permitted to phase-in CECL for regulatory capital purposes.

Lines of Credit and Terminated Memberships

on 8:43 AM

 No credit union likes to see its members leave the credit union or to have to expel someone from membership. However, when a membership is terminated, certain processes and procedures kick in. For example, determining how to close accounts, refund any balance in those accounts and shutting off any debit cards. But what happens to outstanding loan balances?

Under the Federal Credit Union Act, federal credit unions are prohibited from lending to nonmembers. For closed-end credit, this is rather straightforward – the borrower must be a member at the time of consummation. As long as this requirement is met, terminating a membership during the lending relationship does not have a huge impact on the loan. The loan agreement remains in place and the borrower is still obligated to pay back any outstanding balance regardless of their membership status.

However, when it comes to open-end credit, such as a line of credit, HELOC or credit card, the analysis gets a bit more challenging. This is because credit is extended each time a new transaction is made. The effect of this is that the borrower must be a member at the time each new transaction is made. When a membership is terminated, any subsequent transaction on an open-end credit account would be considered lending to a non-member. So, what happens when a borrower ceases to be a member, yet still has available credit on his account?

In Legal Opinion Letter 00-0133, NCUA addressed the issue of new credit card transactions after a membership has been terminated. In the letter, NCUA explains once membership has been terminated, no additional extensions of credit are permitted. However, the former member is still obligated to repay the outstanding balance according to the terms in the account agreement. In practice, this could mean a credit limit is restricted or the account is closed to new purchases when membership is terminated. The issue then becomes what type of notice, if any, is required under Regulation Z. Though keep in mind an adverse action notice may not be required, as discussed in this NAFCU Compliance Blog post.  

Section 1026.9(c) generally requires either 15-day (HELOCs) or 45-day (other types of open-end credit) advance notice of certain changes to the account. However, both section 1026.9(c)(1)(iii) and 1026.9(c)(2)(vi) provide a special rule when decreasing a credit limit. For HELOCs, the notice of a decrease in a credit limit must be provided within three business days of taking such action and note the reason for the action. For other open-end credit accounts, 45-day advance notice is required before a credit union may impose an over-the-limit fee or penalty rate solely for exceeding the newly decreased limit. The notice may be provided orally or in writing and state that the credit limit has been or will be decreased. The preamble to the 2009 final rule that added this provision explains that the decreased credit limit may take effect immediately, but credit unions must wait until 45 days after notice to impose the fee or rate. The preamble goes on to explain that simply showing the decreased credit limit on a periodic statement is not sufficient to meet the notice requirement. The disclosure on the statement must also indicate that the credit limit has been or will be decreased.

When a membership is terminated, either voluntarily or through expulsion, ensuring compliance with the Federal Credit Union Act’s prohibition on lending to nonmembers can easily get overlooked when it comes to open-end credit plans. Federal credit unions may want to verify they have procedures in place to comply with the Act and ensure that proper notice is provided before imposing any fees or penalty rates after decreasing the credit limit. State-chartered credit unions may want to review applicable state law to determine whether similar rules apply.

Compliance: MLA card fee spreadsheet updated for 3Q 2020

on 8:34 AM

 CUNA has updated its Military Lending Act (MLA) credit card fee spreadsheet for the third quarter of 2020. The updated resource can be found in the CUNA Compliance Community’s “CUNA Compliance Tools” folder in the file share library, and under the “Resources” tab in CUNA’s MLA e-Guide.

The spreadsheet is necessary because a credit union may exclude a bona fide credit card fee from the military annual percentage rate (MAPR) if the fee is considered “reasonable,” under the MLA rule.

This means that the fee must be less than or equal to the average fee for the same or similar product charged by five separate card issuers that each have at least $3 billion in outstanding credit card balances at any time during the three-year period preceding the time the average is determined.

Currently, there are approximately 20 large card issuers that meet this requirement and only one of those is a credit union.

Together these card issuers have about 260 card agreements in the Consumer Financial Protection Bureau’s Card Agreement Database, but since many appear to be Private Label cards, only around 85 of the agreements seem to be useful for MLA purposes.

The exclusion generally applies to finance charges under Regulation Z such as cash advance fees, foreign transaction fees, balance transfer fees and transaction fees for purchases and minimum interest charges. Other charges, which are not finance charges under Regulation Z, such as a late fee or an over-limit fee are not included in the calculation of the MAPR, so the exclusion does not apply.

The exclusion does not apply to fees or premiums for credit insurance, fees for a debt cancellation contract, fees for a debt suspension agreement, or to fees for a credit related ancillary product. Those fees must be included in the calculation of the MAPR.

Credit unions can also find in the above-mentioned locations:

  • First and second quarter spreadsheet for 2020;
  • All four quarterly spreadsheets from 2019;
  • All four quarterly spreadsheets from 2018; and
  • The Initial spreadsheet from September 2017.

In addition to the CompBlog, CUNA’s Compliance Community contains discussion boards and a number of other resources for credit union compliance professionals around the country.

Credit Unions Capture Just 4.8% of COVID Checking Funds

on 8:20 AM

 COVID-19 drove consumers to deposit money into their financial institution accounts in droves – bringing in about $3.4 trillion to commercial banks, savings banks, fintechs and credit unions since the beginning of the pandemic. And around 30% of those funds went into checking accounts, with credit unions receiving the smallest pile, according to new data from financial institution research firm Moebs $ervices.

According to the Lake Forest, Ill.-based company, commercial banks have received 61.3% of checking account deposits during COVID, followed by savings banks (thrifts) at 26%, other types of depositories (mainly fintech firms) at 7.9% and credit unions at 4.8%. The firm said commercial banks fell short 20% compared to their typical influx of new money, while savings banks and fintechs gained more than their usual shares of new money (which are 13% and 3%, respectively), and credit unions fared the worst.

“Severely concerned about preserving capital – more so than banks – credit unions fell 40% of what they would normally get in new dollars,” Moebs Services CEO and Economist Michael Moebs said. “All depositories won, but savings banks and fintechs exceeded expectations, capitalizing on the influx of COVID money.”

Moebs $ervices also broke down where consumers deposited their money during the COVID-19 pandemic across all financial institutions by account type. Seeing the biggest increase in deposits were interest-bearing checking accounts, with a 67.9% jump; institutional money market mutual funds with a 40% jump; non-interest-bearing checking accounts with a 34.4% increase; IRA and Keogh retirement accounts with an 18.6% increase; savings and share accounts with a 15.6% jump; and retail money market mutual funds with a 13.1% jump.

Certificates of deposit came in last on consumers’ lists of the types of accounts they chose to deposit their COVID funds into, according to the firm. Jumbo CDs received 9.2% fewer deposits than usual, and retail CDs saw a 24.6% drop in deposit dollars. Moebs $ervices noted the popularity of checking accounts was due in part to consumers and businesses wanting easy access to their funds, as well as savings banks and fintechs offering appealing rates.

“Savings banks and fintechs maintained their interest rates at pre-COVID levels before gradually reducing [them],” Moebs said. “As the Federal Reserve quickly dropped Treasury bill and bond rates, banks and credit unions followed in lock step. Savings banks and fintechs were slower to reduce rates, offering their current and new customers higher interest than market prices.”

He continued, “In addition, savings banks and fintechs saw many consumers and small businesses were panic stricken, seeking liquidity and easy access to funds. So, they offered interest checking starting at 0.25% and much higher rates for more funds in higher tiers or tranches. Banks and credit unions on average were 0.05% as the FDIC and Moebs $ervices Rate Surveys showed.”

NCUA Approves Proposed Rule to Allow Expanded Use of Derivatives

on 8:13 AM

 The NCUA board on Thursday unanimously approved a proposed rule that would expand the ability of credit unions to invest in derivatives to manage interest rate risk.

The proposed rule would eliminate regulatory language specifying the types of derivatives that credit unions may invest in to manage interest rate risk.

“I know that the very word derivative can have a negative connotation,” NCUA Chairman Rodney Hood said, adding that the agency is still taking a conservative approach in allowing the use of derivatives by credit unions.

The NCUA board in 2014 approved a rule that allowed some credit union involvement in derivatives, but the rule was somewhat restrictive because the industry had not had much experience with them, said Tom Fay, the NCUA’s capital markets manager in the Office of Examination and Insurance.

“The changes included in this proposal would streamline the regulation and expand credit unions’ authority to purchase and use Derivatives for the purpose of managing [interest rate risk],” the proposed rule stated.

“Prudently hedging interest rate risk with properly structured and underwritten interest rate swaps will serve to enhance credit union profitability and reduce safety and soundness risk,” Board Member J. Mark McWatters said.

During Thursday’s meeting, the three board members again appealed to Congress to give the agency oversight control of vendors used by credit unions.

Members cited an agency Inspector General’s report last month that repeated recommendations that the NCUA have that power.

Board member Todd Harper called that omission a “regulatory blind spot.”

Hood said he believes that Congress should wait until the coronavirus crisis has ended before expanding the agency’s oversight power.

However, McWatters said, “The NCUA needs vendor authority and it needs it immediately.”

The NCUA board also received a briefing on cybersecurity risks and actions that credit unions should take.

Johnny Davis Jr., Hood’s special advisor for cybersecurity, told the board that even the smallest credit unions can be targets for various types of breaches.

“There is no such thing in the financial services [world] as being too small to be a target,” Davis said, adding that institutions with under $100 million in assets “present a very lucrative target for some people.”

The board also approved a final rule governing corporate credit unions.

CUNA supports Fannie, Freddie housing goals for 2021

on 9:07 AM

 CUNA remains strongly supportive of the Federal Housing Finance Agency’s efforts to ensure the Government-sponsored enterprises (GSEs or the Enterprises) meet their public mission, it wrote to the agency Tuesday in response to a proposal outlining affordable housing goals for 2021. The FHFA states that both single-family and multifamily housing goals for 2021 will remain the same as the 2018-2020 levels, but the agency will engage in a new rulemaking next year to establish new levels for 2022 and beyond.

“[W]e acknowledge the constraints that the COVID-19 crisis has currently placed on FHFA’s ability to analyze and project reasonable changes to the existing housing goals and support the continuation of those goals at their current levels for 2021,” the letter reads. “We applaud FHFA’s decision to re-engage with this rulemaking in a year to establish housing goals for subsequent years.”

FHFA’s proposal also requested comment on factors to consider in determining whether a GSE that fails to meet a housing goal must submit a housing plan, including forbearance actions, loss mitigation efforts, loan modifications and other market support activities.

CUNA stated that the rulemaking “should not set a precedent that equates forbearances, loan modifications or other loss mitigation efforts with the Enterprises’ affirmative obligation to meet housing goals.”

SBA, Treasury announce simpler PPP forgiveness for loans $50K or less

on 8:47 AM

 The Small Business Administration (SBA), in consultation with the Treasury Department, Thursday released a simpler loan forgiveness application for Paycheck Protection Program (PPP) loans of $50,000 or less. This action streamlines the PPP forgiveness process to provide financial and administrative relief to America’s smallest businesses while also ensuring sound stewardship of taxpayer dollars.

CUNA’s continues to support House and Senate bills that would provide simple forgiveness for PPP loans under $150,000 and “commonsense” liability protections for PPP lenders.

SBA and Treasury have also eased the burden on PPP lenders, allowing lenders to process forgiveness applications more swiftly.  

SBA began approving PPP forgiveness applications and remitting forgiveness payments to PPP lenders for PPP borrowers Oct 2.  According to the SBA, it will continue to process all PPP forgiveness applications in an expeditious manner.

Instructions for completing the simpler loan forgiveness application are available here.