NCUA Update: Looking Ahead to 2014 NAFCU s Regulatory Affairs Team December 10, 2013: 2:00pm-3:30pm NAFCU
NCUA Update Webcast Presented by: Michael J. Coleman, Esq., NCCO Director of Regulatory Affairs Tessema Tefferi, Esq. Senior Regulatory Affairs Counsel PJ Hoffman, Esq. Regulatory Affairs Counsel Angela Meyster, Esq. Regulatory Affairs Counsel
Agenda NCUA s final rule on CUSOs NCUA examinations Flood insurance proposed rule CFPB s final rule on TILA/RESPA integrated mortgage disclosures Corporate Stabilization, NCUSIF and NCUA Budget NCUA s final rule on Liquidity and Contingency Funding Plans
Agenda Continued NCUA s final rule on Loan Participations NCUA s proposed rule on Derivatives CFPB and NCUA Coordination of Mortgage Lending Examinations for 2014 NCUA Proposed rule on Stress Testing NCUA Outlook for 2014
CUSOs The NCUA Final Rule Regarding CUSOs PJ Hoffman Regulatory Affairs Counsel NAFCU
CUSOs Effective Date Effective Date: June 30, 2014 Additionally CUSOs will begin submitting reports to NCUA when the agency s reporting system is fully operational, which will be by December 31, 2015
CUSOs - Summary Expands the requirements of the CUSO regulation to apply to federally insured, statechartered credit unions (FISCUs) to address accounting financial statements, and audits. Includes limits on the ability of less than adequately capitalized FISCUs to recapitalize their CUSOs.
CUSOs - Summary All CUSOs are required to annually provide basic profile information to NCUA CUSOs engaging in certain complex or high-risk activities are required to additionally report more detailed information, including audited financial statements, and general customer information. All subsidiary CUSOs will also be required to follow applicable laws and regulations.
CUSOs Legal Authority NCUA Legal Authority NAFCU does not believe that the NCUA has the legal authority to require CUSOs to submit their financial reports to the agency. NCUA argues they do Acknowledges they do not have direct authority over operations of CUSOs Instead, NCUA argues it has the authority to regulate FCUs lending and investment in CUSOs
CUSOs Legal Authority NCUA s basis for legal authority Title II of the FCU Act In order to protect the NCUSIF Fund CUSOs present material risks to the credit union industry A single CUSO can cause losses and operational problems at a number of credit unions. They give 5 cases in which a CUSO has caused a loss to the NCUSIF
CUSOs - FISCUs Expanding requirements to apply to federally insured, state-chartered credit unions (FISCUs) to address accounting financial statements, and audits. Amends 741.222 to specify that current 712.2(d)(2), which imposes recapitalization restrictions, and 712.3(d), which addresses CUSO accounting, audits, and financial statements, also apply to FISCUs
CUSOs - Recapitalization Currently less than adequately capitalized FCUs must obtain written approval from their Regional Director before making an investment in a CUSO in excess of 1% of the paid-in and unimpaired capital and surplus. The final rule adds similar requirements to FISCUs except where state law specifies a higher investment limit. The FISCU must also obtain written approval from the appropriate SSA before making the investment.
CUSOs - Agreements FISCUs are now required to follow 712.3(d) A credit union agreement with a CUSO must require the CUSO to account for all of its transactions according to Generally Accepted Accounting Principles (GAAP), Prepare quarterly financial statements, and Obtain an annual audit of its financial statements
CUSOs Reporting Basic vs Complex or High Risk Activities CUSOs Most CUSOs only have to file reports that submit basic profile information such as legal name, tax ID #, credit unions investing in or chartered with. Complex or High Risk Activities CUSOs must report more substantive information such as audited financial statements and more specific customer information. NCUA will publish guidance on the report itself regarding the format, timing, and required information.
CUSOs Complex or High Risk Credit and Lending Business loan or consumer mortgage origination Loan supporter services, including servicing Student loan or credit card loan origination Information Technology Electronic transaction services Record Retention, security, and disaster recovery services Payroll processing services Custody, safekeeping, and investment management services for credit unions.
CUSOs Subsidiary CUSOs The CUSO rule applies to all levels or tiers of a CUSO s structure. Any subsidiary entity in which a CUSO invests will also be treated as a CUSO and subject to the regulation. This does not apply to third parties that the CUSO contracts with or otherwise does business.
CUSOs Table: Summary of Primary Changes to CUSO-Related Rules Rule Element CUSO Subsidiaries clarifies applicability of the regulations to CUSO subsidiaries. Credit Union Action (Required by June 30, 2014) None New for all Credit Unions CUSO Registry requires credit unions to ensure that the CUSOs with which they do business agree to provide certain information directly to NCUA and the state supervisory authority, as applicable, on an annual basis. CUSO Accounting requires credit unions to ensure that the CUSOs with which they do business agree to comply with generally accepted accounting principles and obtain a financial statement audit. Amend written agreement between credit union and CUSO New for all Federally Insured, State- Chartered Credit Unions* Less than Adequately Capitalized Federally Insured, State-Chartered Credit Unions added preapproval process for federally insured, state-chartered credit unions that are, or would be rendered, less than adequately capitalized by an additional investment in a CUSO. None * These provisions previously only applied to federal credit unions.
NCUA Exams As part of its Regulatory Modernization Initiative, NCUA issued its Letter to Credit Unions 13-CU-09. It streamlines the examination report and clarifies for FICUs the difference between a Document of Resolution (DOR) and an Examiner s Findings Report. Full implementation begins with exams that start on or after January 1, 2014
NCUA Exams Exam Report What documents are in an Examination Report? Examination Report Cover Letter (Required) Table of Contents (Required) Examination Overview (Required) Document of Resolution (DOR)(If applicable) Examiner s Findings (If applicable) Loan Exceptions Schedule (If applicable) Supplimentary Facts (If applicable) Status Update (If applicable) FISCU CAMEL Disclosure (required for FISCUs)
NCUA Exams Report Changes Changes to the NCUA Examination Report 13-CU-09 clarifies that DOR and the Examiner Findings Report will now be stand-alone documents. It delineates or defines each specific document s purpose to ensure that credit union officials can differentiate between major and minor problems.
NCUA Exams Report Changes Document of Resolution (DOR) More Urgent a description of material problems, along with the agreedupon corrective actions. Ideally, the DOR will include corrective action plans developed cooperatively between examiners and credit union officials for concerns of the highest priority. Failure to correct problems documented in the DOR may result in enforcement actions, and will impact CAMEL and risk ratings. 13-CU-09
NCUA Exams Report Changes Examiner s Findings Report Less Urgent Management may use its own discretion to determine the timeframe and approach for correcting these problems; however, we expect management to address concerns documented in the Examiner s Findings within a reasonable timeframe. Unresolved Examiner s Findings will impact CAMEL and risk ratings. 13-CU-09
NCUA Exams Report Changes Other documents that are changing Examination Overview DOR Status Report Informal Discussion Items Supplementary Facts Status Update Template
NCUA Exams Process Changes NCUA will implementing new procedures for issuing and following up on the examination report. Once a credit union is issued a DOR to cease certain activities, the credit union must notify its NCUA Regional Office in writing once appropriate corrective action is implemented. Examiners must follow up with a credit union on outstanding DOR items within 120 days after the timeframe for completion is passed.
Flood Insurance On October 30, 2013, the OCC, Fed Reserve, FDIC, Farm Credit Administration, and the NCUA issued a proposed rule regarding flood insurance. The rule proposed to do a few things. Require credit unions with assets of more than $1 billion to escrow premiums and fees for flood insurance Require credit unions to accept private flood insurance Changes to force-placed flood insurance requirements New and revised sample notice forms and clauses
Flood Insurance - Escrow Escrow This proposed rule would require credit unions with assets of more than $1 billion, or servicers acting on their behalf, to escrow premiums and fees for flood insurance for any loans secured by residential improved real estate or a mobile home.
Flood Insurance - Private Private Flood Insurance is an insurance policy that is issued by an insurance company that is: i) licensed, admitted, or otherwise approved to engage in the business of insurance in the State of jurisdiction in which the insured building is located, by the insurance regulatory of that State or jurisdiction; or ii) Recognized, or not disapproved, as a surplus lines insurer by the insurance regulatory of the State where the property to be insured is located in the case of a policy of difference in conditions, multiple peril, all risk, or other blanket coverage insuring non-residential commercial policies. It must also be at least as broad as the coverage provided under the standard flood insurance policy under the National Flood Insurance Program, including when considering deductibles, exclusions, and conditions offered by the insurer.
Flood Insurance - Private The private flood insurance policy must also include the following: 1) Information about the availability of flood insurance coverage under the National Flood Insurance Program (NFIP); 2) A mortgage interest clause similar to the clause contained in a standard flood insurance policy under NFIP; 3) A provision requiring an insured to file suit less than one year after the date of a written denial of all or part of the claim; 4) Cancelation provisions that are as restrictive as the provisions contained in a standard flood insurance policy under the NFIP. The insurer must also give 45 days written notice of cancellation or nonrenewal of flood insurance coverage to the insured and the credit union.
Flood Insurance Force-placed This proposed rule amends the force-placement of flood insurance provisions to clarify that a lender or its servicer has the authority to charge a borrower for the cost of flood insurance coverage commencing on the date on which the borrower s coverage lapsed or became insufficient. The proposal also stipulates the circumstances under which a lender or its servicer must terminate forceplaced flood insurance coverage and refund payments to a borrower.
Contact Info PJ Hoffman Regulatory Affairs Counsel pjhoffman@nafcu.org (703) 842-2212
Part II Tessema Tefferi Senior Regulatory Affairs Counsel NAFCU
Covered Topics CFPB s final rule on TILA-RESPA Integrated Mortgage Disclosures Corporate Stabilization, NCUSIF and NCUA Budget NCUA s final rule on Liquidity and Contingency Funding Plans NCUA s final rule on Loan Participations NCUA s proposed rule on Derivatives
Integrated Mortgage Disclosures Final Rule issued on November 20, 2013 Total Pages 1888, including text of regulation, forms, official staff interpretation and preamble Purpose and the Basics To make understanding of the content easier Combines current TILA Early Disclosures and RESPA GFE Combines HUD-1 and TILA closing disclosure Effective date August 1, 2015 Better than proposal. Why? No All-in APR 21 months for implementation More favorable definitions ex: business day
Integrated Mortgage Disclosures Basic Overview Loan Estimate 3 business days after application Business day does not include Saturdays Application 7 business days between Loan Estimate and Closing Business day includes Saturdays Borrower can waive bona fide personal emergency Closing Disclosures 3 business days before consummation Business day includes Saturdays Clock restarts if the APR is inaccurate and must be changed, the loan product changes, or a prepayment penalty is added Borrower can waive bona fide personal emergency Tolerances More restrictive than current
Integrated Mortgage Disclosures
Corporate Credit Union Stabilization Corporate Credit Union Stabilization No Stabilization Assessment for 2014 Why? Improved state of the Stabilization Fund Remaining estimated assessments range lowered to between $- 0.2 billion and $0.6 billion (from $0.9 billion and $3.2 billion as of 6/30/2013) Any more Stabilization Fund assessment? To early to tell NGN Portfolio; Legacy Assets Additional considerations Recoveries from settlements (including $1.417 billion from JP Morgan Chase) Improving state of the Stabilization Fund
NCUSIF and NCUA Budget NCUSIF Current equity ratio Estimated premium range of 0-5 basis points for the NCUSIF, with 0 being most probable 13-CU-14 Issued in November, 2013 2014 Operating Budget The NCUA budget was increased by $16.9 million or 6.7% for 2014 - $268.3 million Large portion of the increase increase in employee pay and benefit (but no new FTE) first employee salary increase in 2 years (3 for management)
Emergency Liquidly Final rule issued in October; Effective March 31, 2014 13-CU-10 Background Liquidity Crisis U.S. Central Corporate FCU Conservatorship NCUA s rationale Credit unions need access to emergency liquidity Lessons learned from Liquidity Crisis U.S. Central closing October, 2012
Emergency Liquidly Credit unions grouped into 3 categories, based on asset-size FICU Rule Requirement Under $50 million Maintain a basic written, board-approved liquidity policy. The policy must: - provide a framework for managing liquidity ; and, - a list of contingent liquidity sources that can be employed in emergency situations. $50 million or more Written liquidity policy. A contingency funding plan that clearly sets out strategies for meeting emergency liquidity needs. $250 million or more Written liquidity policy Contingency funding plan Access to at least one contingent federal liquidity source: CLF, Discount Window, or Both
Emergency Liquidly Written policy Can be stand alone or part of existing policy (i.e., ALM policy) Establish liquidity measures and associated benchmarks Include reporting to keep the CU s board apprised about the CU s liquidity position List contingent source of funding, which can include: A corporate CU Correspondent bank FHLB NCUA s reasons for establishing different requirements based on asset size CUs with less than $50 million in assets have limited liquidity concerns New rule located in new 741.12
Emergency Liquidly Access to the Fed s Discount Window Currently, about half of FICUs over $250 million have established access How? http://www.frbdiscountwindow.org/index.cfm Can use one or more of the three credit programs: (1) primary; (2) secondary; or (3) seasonal All three require collateral to obtain loans
Membership in the CLF How? http://www.ncua.gov/resources/clf/pages/default.aspx Subscribe to the capital stock of the CLF one-half of one percent of the CU s paid-in and unimpaired capital and surplus. Effective March 31, 2014 Emergency Liquidly
Loan Participations Loan participation rule applies to FICUs Rule focus on Purchaser CU as Originating Lender (seller) FCUs must retain 10% of the outstanding balance of the loan State-chartered; CUSOs 5 % Originating lender must participate in loan for the life of the loan
Loan Participations CU as a Purchaser By written internal policy, establish: Exposure limit to loan participations purchased from one seller Max: Greater of $5 million or 100% of FICU s net worth Small CUs Up to $5 million regardless of net worth Note: no CU/CUSO loan participation aggregation for purposes of the concentration limit Written standards for loan participations Limits to exposure on the amount of loan participations by each loan type Limits to exposure to loans made to one borrower or associated borrowers
CU as a Purchaser Loan Participations Can only purchase participation interests in loans it is empowered to make Must execute written participation agreement with Originating Lender, which must: Identify the participations to be purchased Spell out the level of risk retention Explain the responsibilities of the parties (lender, servicer, participant) Can only buy from an eligible organization CU, CU organization, or financial organization No change Financial organization includes federal and state agencies
Loan Participations Waiver Seek waiver from exposure limits from Regional Director RD must provide decision within 45 days of receiving completed request Appeal of the RD s decision must be made to the NCUA Board within 60 days of receipt of the decision 13-CU-07 Loan participation waivers One-time or blanket CU level waiver Loan level waiver Required Information in Application p.4 of Supervisory Letter 13-04
Loan Participations Effective Date September 23, 2013 (pushed from 7/25/13) Means that rule applies to LPs made after 9/23/13 What about for existing portfolio? LPs made prior to effective date are grandfathered Grandfather provisions related to the concentration limit threshold as of 9/23/13
Derivatives Allow credit unions that meet certain criteria to engage in limited derivatives activities Purpose to hedge against IRR Eligibility Asset Size - $250 million or more Qualifications - CAMEL Expertise Limits Vanilla interest rate swaps Interest rate caps Level I or Level II Authority
65 + Comments Submitted Strong support for authority General opposition to Pay-to-play NCUA estimates 75 to 150 CUs to be interested initially NAFCU and others opposition to: Asset Threshold Limits What s next? Derivatives
Contact Info Tessema Tefferi Senior Regulatory Affairs Counsel ttefferi@nafcu.org (703) 842-2268
Part III Angela Meyster Regulatory Affairs Counsel NAFCU
Covered Topics CFPB and NCUA Coordination of Mortgage Lending Examinations for 2014 NCUA Proposal on Stress Testing NCUA Outlook for 2014
Mortgage Lending Examinations NCUA and CFPB working together to create examination guidelines Standard: good faith effort toward substantial compliance
Stress Testing and Capital Planning Proposal Proposed Rule- Comments due Dec. 31, 2013 Copy of Proposal: http://www.ncua.gov/legal/documents/regul ations/pr20131024capitalplanningandstresst esting.pdf
Stress Testing and Capital Planning Proposal Scope: applies only to federally insured credit unions $10 billion or more in assets (as of their March 31 Call Report) Purpose: NCUA wants largest FICUs to have systems and processes in place to monitor whether they can maintain their capital adequacy Want to protect the NCUSIF Seek regulatory parity
Stress Testing and Capital Planning Proposal Capital Plan: Must be submitted annually to NCUA by March 31 st Mandatory elements include: Assessment of sources and level of capital over the planning horizon Expected and adverse conditions Discussion of how the credit union plans to maintain ready access to funding to meet its obligations and serve its members Any expected changes to the credit unions business plan that could materially affect its capital adequacy or liquidity
Stress Testing and Capital Planning Proposal Capital Plan Required Analyses: Sensitivity analysis to evaluate effect on capital of changes in variables used in capital plan Test impact of an interest rate shock of plus or minus 300 basis points on the net economic value, using final maturities of non-maturity shares not exceeding two years Impact of credit risk to capital under unfavorable conditions, both isolated from and combined with unfavorable interest rates
Stress Testing and Capital Planning Proposal Capital Planning and Analysis Governance: Considerations for Board of Directors in future processes: Financial condition, size, complexity, risk profile, operations, and level of regulatory capital Considerations for senior management: Take into account all of the complexities of the credit union s risk exposures and operations Board responsibility: Establish and review a capital analysis policy in conjunction with credit union s capital plan
Stress Testing and Capital Planning Proposal NCUA Action on Capital Plans: Notify CU if it has accepted plan by June 30 th NCUA has authority to reject plan. Grounds for rejection: if material unresolved supervisory issues associated with planning process or if assumptions, methodologies, analyses, or data underlying plan are not reasonable/appropriate/lack integrity. If NCUA rejects capital plan, CU must update and re-submit plan within 30 days of receiving rejection notice
Stress Testing and Capital Planning Proposal NCUA Action on Capital Plans Continued: If credit union operates without a NCUAapproved capital plan after September 30 th of the year plan was submitted, NCUA will subject it to supervisory actions
Stress Testing and Capital Planning Proposal Annual Supervisory Stress Testing NCUA to conduct independent stress tests on all covered credit unions based on September 30 financial data NCUA will provide description of various scenarios underlying the test If stress test for particular CU shows it does not have ability to maintain a capital ratio of at least 5% on a pro-forma basis, under both expected and stressed conditions, NCUA will require CU to take steps to enhance its capital or take other supervisory actions
Stress Testing and Capital Planning Proposal Exclusions from capital ratio calculation for stress testing: Assistance through Section 208 of the Federal Credit Union Act; Subordinated debt for low-income credit unions; Credit union s NCUSIF deposit
NCUA Look Ahead: 2014 Capital Reform Link to Chairman Matz s Speech at NAFCU s Annual Conference announcing New Risk- Based Capital Framework
NAFCU s Five-Point Plan For Regulatory Relief NAFCU s Five-Point Plan For Regulatory Relief as it relates to capital reform: Direct NCUA to, along with industry representatives, conduct a study on prompt corrective action, and recommend changes. Modernize capital standards to allow supplemental capital; and direct the NCUA Board to design a risk-based capital regime for credit unions that takes into account material risks. Establish special capital requirements for newly chartered federal credit unions that recognize the unique nature and challenges of starting a new credit union.
NCUA Look Ahead: 2014 Securitizations and other expansions of investment power Bylaws Field of membership NCUA Letter to Federal Credit Unions: Potential Violations of Common Bond Advertising Requirements
Contact Info Angela Meyster Regulatory Affairs Counsel ameyster@nafcu.org (703) 842-2272
Questions? Contact Info: Michael Coleman, Esq., NCCO Tessema Tefferi, Esq. PJ Hoffman, Esq. Angela Meyster, Esq. http://www.nafcu.org/contactus/#regulatory_affairs