Editor’s Note: A condensed version of this column originally appeared in Credit Union Journal (opens new window) on Nov. 13, 2018.
Is bipartisanship dead? For more than two years, the NCUA has operated with a bipartisan two-member Board. Given today’s political climate, you might reasonably expect this means our Board has ceased to function. Well, we are happy to report that political gridlock most certainly has not taken hold at the NCUA. Instead, over a period spanning both of our chairmanships, we have overseen a reform and modernization effort that will allow both the NCUA and the credit union system to navigate the rapidly evolving financial services landscape while still maintaining safety and soundness. We have successfully guided these efforts by working together in a collegial and collaborative manner with an appreciation that compromise reflects strength, not weakness, as reasonable minds may — and will — differ.
Providing Regulatory Relief While Protecting Taxpayers
As members of the NCUA Board, we have a responsibility to ensure the National Credit Union Share Insurance Fund remains strong and credit unions comply with all applicable laws and regulations. We also recognize that credit unions must compete in a dynamic and ever-changing market place. As such, we have engaged in regulatory actions that strike a balance between safety and soundness while still providing credit unions with measures of regulatory relief where appropriate.
Our partnership has resulted in more than two dozen substantive changes to NCUA’s regulatory structure, resulting in less burdens on credit unions, while enhancing access to affordable financial services, including for consumers in unbanked and underserved communities.
We have already completed ten of our Regulatory Reform Agenda’s initial recommendations and proposed rules or commenced action on five others. Among the recommendations completed are:
- Providing additional flexibility to corporate credit unions’ capital standards;
- Improving the NCUA’s emergency merger process;
- Recognizing that federal credit unions may securitize the loans they make;
- Improving the NCUA’s appeals process for examination determinations to ensure due process and fairness;
- Improving and centralizing the NCUA’s appeals procedures in one section of the NCUA’s regulations;
- Providing greater transparency on the calculation of each eligible financial
- institution’s pro rata share of a declared equity distribution from the Share Insurance Fund;
- Decreasing the burden and improving the efficiency of the NCUA’s capital planning and stress testing rules;
- Decreasing the regulatory burden and adding flexibility to the NCUA’s advertising requirements;
- Adding flexibility to the NCUA’s field-of-membership processes; and
- Delaying the implementation date of the agency’s 2015 risk-based capital rule for one year and raising the asset threshold that defines complex credit unions, exempting an additional 1,026 credit unions from the rule.
We also proposed regulatory changes to provide federal credit unions with another option to issue payday alternative loans and sought comment on a third potential option. The various payday alternative loan options we have proposed are designed to enable federal credit unions to assist the underserved, unbanked, and other consumers by offering federally insured, market-based alternatives to traditional payday lenders.
Additionally, we proposed or sought advance comment on changes that would provide credit unions with additional measures of regulatory relief by:
- Improving federal credit union bylaws;
- Clarifying and enhancing the usability of the NCUA’s loan maturity requirements;
- Clarifying the NCUA’s limits on loans to a single borrower or group of associated borrowers; and
- Revising the NCUA’s appraisals regulation to reduce its burden on credit unions and make compliance easier.
The Regulatory Reform Task Force’s second report, which will provide an updated blueprint for our regulatory agenda and a formal means of measuring the agency’s efforts, will be published in the coming months.
Improving Transparency and Efficiency
One of our first initiatives as a two-member Board was to bring increased transparency to the NCUA’s budgetary process. The finite resources of federally insured credit unions and their members finance the agency’s budget. We firmly agree the agency should only allocate these funds following thoughtful reflection as to the necessity of any expenditure and whether the costs have been undertaken in the most efficient, effective, transparent, and fully accountable manner. To that end, we voluntarily held public budget hearings for and solicited comment on, the agency’s proposed 2017–2018 and 2018–2019 budgets. We also posted a detailed budget justification and numerous related documents on our website. And we undertook these actions two budgetary cycles prior to the enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155), which requires the agency to continue its transparent budget practices.
As important as it has been for us to improve the regulatory environment, we can never lose focus of the agency’s critical safety and soundness mission and how best to carry that out as efficiently and effectively as possible. In 2017, we instructed staff to conduct an in-depth review of the NCUA’s office space and staffing needs. This review resulted in a plan that reduces the agency’s regional structure from five to three offices, eliminates 80 percent of the agency’s leased space, and reorganizes several central office functions to reduce costs and promote greater efficiencies. We are implementing the last phases of this reorganization plan, which will be completed by the end of the year.
Enhancing the Examination Program
As part of the agency’s broader reform plan, we have also undertaken a number of initiatives to increase the efficiency and consistency of our examination, data collection, and reporting efforts. We believe these initiatives will reduce the agency’s regulatory footprint and provide the agency with the tools it needs to meet its safety and soundness mission in the future.
The Enterprise Solution Modernization Program will modernize the agency’s technology solutions to create an integrated examination and data environment. The result will yield a flexible technology architecture that integrates modernized systems and tools across the agency and makes examinations, data collection, and reporting more effective and cost efficient. The program will also improve the examination process and ease burdens on credit unions and staff by reducing time spent onsite in credit unions.
The Exam Flexibility Initiative produced greater examination efficiency and flexibility for credit unions and the agency. This initiative adjusted the frequency of examinations based on a credit union’s size, complexity, operating condition, and, in the case of state-chartered credit unions, the frequency of state examinations. These changes have resulted in meaningful relief for the vast majority of credit unions, led to greater coordination between federal and state regulators, and allowed the agency to focus its efforts on troubled credit unions, thus addressing issues of concern in a timelier and more cost effective manner.
We are also improving our quality control program to strengthen our examination and supervision process. We have also updated our subject matter expert and core examiner training programs, and implemented new data analytical techniques. These improvements will increase our consistency when identifying, assessing, and responding to risks in the system. They will also allow us to address safety and soundness issues earlier and at less cost to the Share Insurance Fund.
Addressing Cybersecurity Risks
Financial technology, or fintech, is poised to transform the financial services industry by increasing efficiency and convenience, and by providing new and innovative solutions to consumers and businesses. This revolution is requiring traditional financial service providers, including credit unions, to adapt and embrace new methods, technological innovation, and new technology partners in order to remain competitive in the marketplace.
As technology plays a greater role in nearly all aspects of the financial services sector, all financial institutions — from small credit unions to large, multi-national banks — face continuous and evolving cybersecurity risks.
Yet, the credit union system is vulnerable because the NCUA is the only federal financial institutions regulator that does not have the authority to examine and supervise third-party vendors, including credit union service organizations — a potential systemic risk noted by both the Government Accountability Office and the Financial Stability Oversight Council.
The lack of vendor authority means the NCUA cannot accurately assess the actual risks present in credit union system and determine if the current risk-mitigation strategies and practices used by CUSOs and other third-party vendors are adequate. As more and more credit unions utilize CUSOs, fintechs and other third parties, addressing this vulnerability is critical because thousands of credit unions, billions in assets and millions are credit union members are potentially exposed.
We both support legislation that would provide the NCUA with the authority to examine and supervise CUSOs and other third-party vendors that is comparable to our Federal Financial Institutions Examination Council counterparts. This authority would allow us to address any potential cybersecurity risks to the system and provide some measure of administrative and regulatory relief for many credit unions as they would no longer caught between their vendor and their regulator and insurer. Together, we will work with Congress and other stakeholders to address this critical regulatory blind spot.
Again, we ask: is bipartisanship dead? No. To the agency’s and credit union community’s benefit, it’s very much alive and thriving at the NCUA. And it’s producing results.