NCUA Board Approves Final Rule on Financial Innovation

Board Action Bulletin

ALEXANDRIA, Va. (Sept. 21, 2023) – The National Credit Union Administration Board held its eighth open meeting of 2023 and unanimously approved a final rule that amends the NCUA’s regulations regarding indirect lending, the purchase of loan participations, and the purchase, sale, and pledge of eligible obligations and notes of liquidating credit unions. In addition, the NCUA’s Chief Financial Officer briefed the Board on the performance of the National Credit Union Share Insurance Fund during the second quarter of 2023.

Board Approves Final Rule on Financial Innovation

The NCUA Board approved a financial innovation final rule that clarifies the NCUA’s current regulations and provides flexibility for federally insured credit unions to take advantage of advanced technologies and opportunities offered by the financial technology sector.

“This new rule codifies several long-standing supervisory guidance letters on third-party due diligence, indirect lending, and loan participations, and it shifts the regulatory framework from a prescriptive structure to a principles-based system,” NCUA Chairman Todd M. Harper said. “However, with greater freedom also comes greater responsibility. Managers and boards of directors choosing to use this new rule, therefore, must ensure their third-party due diligence and vendor management policies are updated, followed, and reflect the size and complexity of their activities and risk levels.”

In addition, the final rule:

• Relocates and clarifies the NCUA’s provisions regarding indirect lending and indirect leasing.
• Provides credit unions with additional flexibility to participate in loans acquired through indirect lending arrangements, allowing federally insured credit unions to use advanced technologies and opportunities offered by the fintech sector.
• Removes certain restrictions and other qualifying requirements relating to eligible obligations and provides credit unions with additional flexibility to purchase eligible obligations of their members.

With the adoption of this final rule, the limits previously found in the NCUA’s regulations are replaced with policy, due diligence, and risk-management requirements that can be tailored to match each credit union’s risk levels and activities.

The final rule is effective 30 days after publication in the Federal Register.

Assets in CAMELS Code 3, 4, and 5 Credit Unions Increase; Equity Ratio Projected at 1.27 Percent

The Chief Financial Officer briefed the NCUA Board on the performance of the Share Insurance Fund and the status of its equity ratio, noting that the fund reported a net income of $37.1 million and a net position of $20.5 billion for the second quarter of 2023. The Share Insurance Fund’s total assets decreased to $20.5 billion at the end of the quarter from $21.0 billion at the end of the first quarter of 2023. As of the end of the second quarter of 2023, the equity ratio was 1.27 percent.

“The Share Insurance Fund’s performance in the second quarter of 2023 mirrors the industry’s financial performance during the same period. The fund, like the credit union system, is doing well overall, but there are warning signs that we cannot ignore,” Chairman Harper said. “I cannot emphasize this enough: Credit union executives, supervisors, and boards of directors must remain ahead of this trend by remaining diligent in managing the potential risks on their balance sheets and when monitoring economic conditions and the interest rate environment.”

The quarterly report also included an equity ratio projection. For December 31, 2023, NCUA staff projects the equity ratio for the Share Insurance Fund will be 1.27 percent.

Additionally, for the second quarter of 2023:

• The number of composite CAMELS code 4 and 5 credit unions increased from 127 to 134 at the end of the second quarter of 2023. Assets for these credit unions from the second quarter of 2023 increased from $5.6 billion to $6.3 billion.
• The number of composite CAMELS code 3 credit unions decreased from 779 to 771 at the end of the second quarter of 2023. Assets for these credit unions increased from the first quarter of 2023 to $91.0 billion from $80.0 billion.

Two federally insured credit union failures in 2023 cost the Share Insurance Fund approximately $1.2 million in losses.

The second quarter figures are preliminary and unaudited. Additional information on the performance of the Share Insurance Fund is available on the NCUA’s website.

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