Changes to Voluntary Mergers, Appeals Process, Corporate Rules Approved by Board

During its open meetings in May, June and July, the NCUA Board approved the following items:

  • A request for public comment on the agency’s proposed plan to close the Temporary Corporate Credit Union Stabilization Fund in 2017, four years ahead of schedule, and provide credit unions with a Share Insurance Fund distribution in 2018, estimated to be between $600 million and $800 million. (See page 1)
  • A notice of proposed rulemaking amending the agency’s share insurance requirements rule to provide greater fairness, predictability, and transparency and add a temporary provision to govern share insurance equity distributions related to the Corporate System Resolution Program. (See page 7)
  • A proposed rule amending the agency’s definition of “in danger of insolvency” to give the agency more flexibility to act in cases of emergency mergers.
  • The publishing of a request for comment in the Federal Register on proposed changes in the methodology used to determine the Overhead Transfer Rate.
  • A notice of proposed rulemaking amending the agency’s regulations to create more transparency and simplicity in the rules governing corporate credit unions.
  • A final rule updating agency regulations on the treatment by the NCUA Board, as liquidating agent or conservator of a federally insured credit union, of financial assets transferred by a credit union in connection with a securitization or loan participation.
  • A final rule revising agency procedures for disclosing records under the Freedom of Information Act.
  • A final rule adjusting civil monetary penalties for inflation.
  • A proposed rule to provide greater transparency to member-owners of federal credit unions when those credit unions are seeking voluntary mergers.
  • A proposed rule to enhance due process and provide consistency with other federal financial institutions regulators in the supervisory appeals process.
  • A proposed rule to provide uniform, comprehensive procedures that will govern the agency’s regulatory appeals process.

Additionally, the Board received briefings on the performance of the Temporary Corporate Credit Union Stabilization Fund, the agency’s Enterprise Solution Modernization initiative, the revised 2017 budget estimates and the performance of the National Credit Union Share Insurance Fund.

 

Definition Change Would Give NCUA More Flexibility in Emergency Mergers

NCUA would have additional flexibility in situations warranting emergency mergers under a proposed rule (Part 701) approved by the Board at its July meeting.

The proposed rule would amend the definition of the phrase “in danger of insolvency” in the agency’s Chartering and Field of Membership Manual. The current definition requires credit unions to fall into at least one of three net worth categories over a period of time in order to be found in danger of insolvency. The proposed rule would lengthen the time period for two of those categories by six months. The proposed rule would also add a fourth category, to include credit unions that have been granted or received Section 208 assistance within the 15 months before a determination of a danger of insolvency has been made.

Comments on the proposed rule are due by Sept. 29. For more information or to submit a comment, go to https://go.usa.gov/ xRUdb.

 

New Overhead Transfer Rate Methodology Proposed

Credit union system stakeholders will have an opportunity to comment on NCUA’s proposed changes to how it calculates the Overhead Transfer Rate.

NCUA in January 2016 published its original request for comment on the existing methodology for calculating the rate. Based on 40 comment letters received in response to that request and a subsequent internal assessment, the agency is proposing changes to the methodology to reduce the complexity of the methodology and the resources necessary to administer the Overhead Transfer Rate.

The Overhead Transfer Rate represents insurance-related costs in the agency’s operating budget to be funded by the National Credit Union Share Insurance Fund.

The staff presentation on the proposed changes to the Overhead Transfer Rate methodology is available at https://go.usa.gov/ xRUw9.

The comment period for this proposal closes on Aug. 29. For more information or to submit a comment on this proposed rule, go to https://go.usa.gov/xRUw8.

 

Current and Proposed Overhead Transfer Rate Methodology Results Comparison

2017 Current Methodology Proposed Methodology Change
Overhead Transfer Rate in Percent 67.7% 60.0% -7.7%
Overhead Transfer Rate in Millions $201.8 $179.0 -$22.8

If the proposed method had been applied to 2017, it would result in the annual Operating Fee paid by federal credit unions increasing by almost 24 percent—an increase of $22.8 million, from $96.4 million to $119.2 million.

 

Agency Seeking Comments on Corporate Credit Union Regulation Changes

NCUA is seeking comments on two proposed changes to its regulations covering corporate credit unions (Part 704) with respect to capital calculations.

The first change would better align capital components with a corporate credit union’s financial statements. The second would clarify the minimum retained earnings requirement for corporate credit unions.

The proposed changes would not alter existing standards for prompt corrective action, and the agency does not propose to change regulations on authorized investments, concentration risk limits, maturity limits or other limitations on corporate investment activities.

Comments on this proposed rule are due Sept. 1. For more information or to submit a comment, go to https://go.usa.gov/ xRUwn.

 

Safe Harbor Rule Updated to Respond to Industry Practices and GAAP

This final rule (Part 709) amends NCUA regulations on how the Board, as liquidating agent or conservator, treats a credit union’s financial assets transferred in connection with a securitization or participation.

The final rule responded to evolving industry practices, clarified provisions in Part 709 that were affected by changes in Generally Accepted Accounting Principles, and paralleled changes made to the Federal Deposit Insurance Act.

The final rule went into effect on July 31. For more information, go to https://go.usa.gov/xRUwE.

Additionally, NCUA issued a legal opinion letter in July on the authority federal credit unions have to issue and sell securities that’s available online at https://go.usa.gov/xRUwQ.

 

Board Approves Revised Agency FOIA Procedures

The Board approved a final rule (Part 792) that changed the agency’s procedures for responding to public records requests under the Freedom of Information Act. Specifically, the rule revised NCUA’s procedures for disclosing records, resolving disputes through the FOIA public liaison and the Office of Government Information Services.

This rule became effective on June 30. For more information, go to https://go.usa.gov/xRUwd.

 

Final Rule Confirmed Required Inflation Adjustments to Civil Monetary Penalties

The Board approved a final rule (Part 747) that amended its regulations and adjusted for inflation the maximum amount for civil monetary penalties under its jurisdiction.

The Federal Civil Penalties Inflation Adjustment Act Improvement Act of 2015 requires agencies to adjust the maximum amounts of civil monetary penalties to account for inflation. The law did not require NCUA to assess the maximum penalty level, and the agency retained discretion to assess at lower levels, as it has done historically.

The final rule went into effect on June 30. For more information, go to https://go.usa.gov/xRUww.

 

Proposed Rule Opened Up Member Communications in Voluntary Mergers

Members whose federal credit unions are seeking a voluntary merger would have better access to information about that merger and a longer period of time to consider their votes under the proposed rule (Parts 701, 708a, and 708b) approved by the NCUA Board in May.

The proposed rule would:

  • Increase the required time for notice to members before a merger vote to at least 45 days;
  • Require the merging credit unions to disclose all merger-related compensation for certain employees and officials of the merging credit union;
  • Clarify the contents and format of the members’ notice to provide better information; and
  • Create a member-to-member communications process similar that found in NCUA’s regulations covering credit union conversions to or mergers with banks.

The comment period on this proposal closed on Aug. 7, and the comments are being reviewed and processed at this time. To view the comments received, go to https://go.usa.gov/xRUwS.

 

Due Process in Supervisory Appeals Enhanced by Proposed Rule

Appeals of material, examination-related supervisory determinations would benefit from greater due process under a proposed rule (Part 746a) approved by the Board.

Proposed changes to the appeals process included:

  • Expanding the number of material supervisory determinations that can be appealed to the agency’s Supervisory Review Committee;
  • Creating an optional intermediate level of review before an appeal goes to the committee; and
  • Changing the nature and composition of the committee.

Under the proposed rule, an appeal at any level would not affect, delay, or impede any formal or informal supervisory or enforcement action in progress. Likewise, it would not affect NCUA’s authority to take any supervisory or enforcement action against a federally insured credit union.

The comment period on this proposed rule closed on Aug. 7, and the comments are being reviewed and processed at this time. To view the comments received, go to https://go.usa.gov/ xRUfj.

 

Corporate Stabilization Fund Balance Sheet

Preliminary and Unaudited (in millions) March 31, 2017 December 31, 2016
Fund Balance with Treasury and Investments $700.4 $455.3
Receivable from Asset Management Estates, Net 876.3 1,078.1
Other 2.7 2.8
Total Assets $1,579.4 $1,536.2
Accounts Payable and Other Liabilities $1.1 $1.7
Borrowings from U.S. Treasury - -
Insurance and Guarantee Program Liabilities - -
Net Position 1,578.3 1,534.5
Total Liabilities and Net Position $1,579.4 $1,536.2

Source: Corporate Stabilization Fund Financial Report

 

Appeals of Some Agency Decisions Improved under Proposed Rule

A proposed rule (Part 746b) approved by the NCUA Board would create a more uniform process for appealing certain program office decisions to the Board.

Several existing NCUA regulations provide a right of appeal, but these generally lack uniformity and may be confusing to parties who might seek to appeal an adverse decision to the Board. The proposed rule would bring these under a uniform set of procedures and would enhance due process for all parties.

Subject matters affected by the proposed rule include chartering and field of membership, investment authority, conversions and mergers, creditor claims in liquidations, and share insurance determinations. Certain areas, such as formal enforcement actions, prompt corrective action and material supervisory determinations, would be excluded from coverage under the proposed rule.

The comment period on this proposal closed on Aug. 7, and comments are being reviewed and processed at this time. To the view the comments received, go to https://go.usa.gov/xRUf5.

 

Stabilization Fund Net Position Remained Positive in Second Quarter

For the quarter ending March 31, 2017, the Temporary Corporate Credit Union Stabilization Fund’s net position increased nearly $43.8 million to end at $1.6 billion.

The increase in the Stabilization Fund’s net position during this time resulted from a $37.8 million reduction in the provision for insurance losses and $6.5 million in guarantee fee income during the first quarter. The reduction in the provision for insurance losses was due primarily to improvements in projected cash flows related to the legacy assets securing the NCUA Guaranteed Notes Program.

Future changes in the economy or the performance of the legacy assets securing the NCUA Guaranteed Notes are likely to change the value of the assets the agency can access. Based on current projections, NCUA expects no future Stabilization Fund assessments to credit unions.

Information on the fund’s performance in the second quarter of 2017 will be presented during the open Board meeting on Sept. 28.

 

2017 Operating Budget Overview

Budget/Employees 2016 in millions 2017 in millions 2017 Mid-Session Projected Estimate in millions Change Percent Change
Budget $290.9 $298.2 $292.2 -$5.8 -2%
Full-time Equivalent Employees 1,247 1,230 1,180 -50 -4%
 
This pie graph shows what percentage of NCUA’s operating budget falls into particular categories. In 2017, 73 percent of the agency’s budget was pay and benefits, 11 percent was for contracted services, 9 percent was travel-related expenses, 4 percent were administrative costs and 2 percent were for rent, communications and utilities.
 

Enterprise Solution Modernization Promises Reduced Burdens on Credit Unions

NCUA’s planned information technology modernization should improve the examination process and ease burdens on credit unions and on staff by reducing the amount of examination and supervision time spent in credit unions, according to a briefing presented to the Board in June.

Launched in 2016, the Enterprise Solution Modernization program, the most complex program NCUA has undertaken, has three key parts:

  • The Examination and Supervision Solution will replace the current examination system used by NCUA and its related supporting applications, including time and workload management tools.
  • The Data Collection and Sharing Solution will define the necessary capabilities for a common platform to serve as a single point-of-entry for all data collection.
  • The Enterprise Data Reporting Solution will lead to better analytics and data reporting.

This program will leverage commercially available tools rather than building and hosting customized systems. NCUA expects an improved user experience and increased efficiencies when the new systems are in place.

For more information on the Enterprise Solution Modernization program, go to https://go.usa.gov/xRUGq.

 

2017 Mid-Year Budget Review Projects $5.8 Million in Savings

NCUA’s Chief Financial Officer reported in July that agency expenditures are estimated to decline by approximately $5.8 million for 2017, based on current projections of agency needs.

The NCUA’s revised 2017 operating budget estimate is now $292.2 million, compared to $298.2 million approved in November 2016. Reduced spending was noted for the following areas:

  • A $2.5 million reduction in pay and benefits, based on factors like the hiring freeze earlier this year, employee turnover and projected hiring and attrition rates.
  • A $1.4 million reduction in travel costs.
  • A $1.2 million reduction in contracted services.
  • A $516,000 reduction in administrative costs.
  • A $122,000 reduction in rental costs.

These savings will be reserved as a contingency for anticipated costs to implement agency restructuring initiatives. (See page 14)

The NCUA currently operates on a two-year budget cycle. The 2018 budget is scheduled to be reviewed at the Board’s November open meeting. The agency plans to host its annual public budget briefing in the fall.

As part of its ongoing commitment to transparency in the budget process, the NCUA continues to make detailed budget information publicly available on its Budget and Supplementary Materials webpage at https://go.usa.gov/xRUGW.

 
In a graph, we show the number of problem credit unions, which are credit unions with a composite CAMEL rating of four or five, from year-end 2012 to June 2017. The source of this information is NCUA’s examination data. At the end of 2012, there were 369 problem credit unions. At the end of 2013, there were 307 problem credit unions. At the end of 2014, there were 276 problem credit unions. At the end of 2015, there were 220 problem credit unions. At the end of 2016, there were 196. In March 2017, there were 197 and in June 2017 there were 2010 problem credit unions.
 

Share Insurance Fund Reached Net Position of $13 Billion in Second Quarter

The Share Insurance Fund in the second quarter of 2017 posted net income of $49.3 million, primarily due to a decrease in the provision for insurance losses.

The fund’s net position was $13.0 billion at the end of the quarter. Second-quarter investment and other income was $49.2 million. Operating expenses were $49.4 million. The provision for insurance losses decreased by $49.5 million.

As of June 2017, the calculated equity ratio was 1.22 percent, based on estimated insured shares of $1.1 trillion. However, when adjusted for the projected one-percent deposit capital adjustment recognized in September, for all federally insured credit unions with assets of $50 million or greater, the equity ratio is estimated to remain at 1.26 percent.

  • The number of CAMEL codes 4 and 5 credit unions increased by 6.6 percent from the first quarter of 2017, to 210 from 197.
  • Assets in CAMEL codes 4 and 5 credit unions increased 11.6 percent from the first quarter to $10.6 billion from $9.5 billion.
  • The number of CAMEL code 3 credit unions declined 1.3 percent from the first quarter to 1,088 from 1,102.
  • Assets in CAMEL code 3 credit unions declined 1.7 percent from the first quarter to $53.6 billion from $54.5 billion.

There were no credit union failures during the second quarter of 2017, compared to six credit union failures in the second quarter of 2016. Year-to-date, two federally insured credit unions failed during the first two quarters of 2017, compared to 11 in the first two quarters of 2016. Total year-to-date losses associated with these failures are $3.8 million, compared to $8.5 million in the first two quarters of 2016. Fraud was a contributing factor in one of the two failures.

The second-quarter figures presented are preliminary and unaudited.