CUNA Comment Letter - 2010 NCUA Regulatory Review

2010 NCUA Regulatory Review

August 6, 2010

Mr. Robert Fenner
General Counsel
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428

RE: 2010 NCUA Regulatory Review

Dear Mr. Fenner:

This letter responds to the request for comments under the National Credit Union Administration (NCUA)’s Regulatory Review for 2010. By way of background, CUNA is the largest credit union advocacy organization in this country, representing approximately 90% of our nation’s 7,700 state and federal credit unions, which serve 93 million members. Many of these comments draw on past letters to the NCUA Board and comment letters we filed with the agency on pending proposals.

Share Insurance

In 2010, share insurance costs are a greater concern for federally insured credit unions than ever before. That is because their National Credit Union Share Insurance Fund assessments reflect costs relating to the number of natural person as well as corporate credit union problem cases that reflect our difficult economic times. CUNA supports the NCUA Board’s efforts to minimize those costs, including consideration of lowering the normal operating level of the NCUSIF from 1.3% to 1.2%, a move that CUNA strongly supports.

We know the agency’s work to address the handling of “legacy assets” held by some corporate credit unions continues, complicated by accounting and other issues. Currently estimated losses on these legacy assets have already been expensed, but since April of last year, CUNA has expressed two concerns with these legacy assets. First, if the actual losses turn out to be sufficiently less than expensed thus far, there should be an opportunity for the credit unions that took the losses to share in the gains, and, second, if the actual losses are greater than expensed thus far, that future capital contributors not be liable for those losses.

CUNA has been encouraged by recent comments of NCUA Board Chairman Debbie Matz and Board Member Mike Fryzel on these issues. While no credit union official wants the agency to rush the development of the solution, we encourage the agency, to the extent feasible, to make public its decision regarding these assets at the September 16, 2010 NCUA Board meeting, the target date most recently indicated by the Board for consideration of the final corporate credit union rule as well as the legacy assets. If complications preclude such an announcement by then, we encourage the Board to at least provide more information to the credit union system on the approaches you are considering and the impediments to their implementation.

Another issue that the agency will be reviewing this year is the Central Liquidity Facility. The issue of the role of the CLF could have important ramifications for natural person and corporate credit unions, as well as for the NCUSIF. CUNA is likewise planning to look into the statutory as well as regulatory framework for the CLF to consider whether important changes should be sought to enhance the role of the CLF.

Administrative Actions

There has been considerable publicity within the credit union system and elsewhere regarding agency efforts to address certain problem cases. As CUNA CEO Bill Cheney said in a recent letter to the NCUA Board, CUNA encourages strong safety and soundness regulation, which is essential to protect credit union members and to minimize National Credit Union Share Insurance Fund costs for all credit unions.

However, credit unions have growing concerns regarding the implementation of some administrative actions. In that connection, CUNA has formed a new Working Group on Supervisory Issues, which will be reviewing the rights and responsibilities of credit union officials when they have a material dispute with their examiner. The group will also be reviewing the role and responsibilities of the examiner. The group plans to create a report by early September that CUNA will share with NCUA and credit unions to clarify the examination and administrative processes. Meanwhile, we urge the Office of General Counsel to work closely with your field and examination staff to ensure all administrative actions are handled appropriately, -- fully reflecting safety and soundness concerns as well as the rights of credit union officials.

Recently, the Office of the Comptroller of the Currency issued a release on its appeals process, which may provide valuable information on improving NCUA’s processes. We also urge NCUA to make more information to credit unions regarding the role of your ombudsman in addressing certain examination issues and the agency’s appeals process.

Member Business Loans

Credit unions are an important source of funding for businesses in their fields of membership. Such activity benefits not only the individual businesses but also the communities in which the business is located. Further, credit union business lending helps to strengthen our economy. Contrary to the portrayal of member business lending in comment letters from banking trade associations, credit union member business lending is a safe and prudent endeavor. Net charge-off rates for member business loans (MBLs) at credit unions are lower than for all other loan types combined. Also, MBLs at credit unions have lower delinquency rates than commercial loans for banks and are certainly much safer than the subprime mortgages that a number of banks have originated.

Currently, the focus of CUNA’s advocacy in the area of MBLs is to support Senator Mark Udall's (D-CO) recently introduced legislation that would lift the current cap on MBLs to 27.5% of total assets, up from the current 12.25% ceiling. CUNA commends the U.S. Department of the Treasury and NCUA for their strong support of this legislation. We urge NCUA to be as proactive as appropriately possible to help achieve passage of this measure.

Credit unions strongly support this legislation and believe they should not be forced to operate with more restrictive MBL limits than those applicable to other financial institutions. CUNA estimates that more than $10 billion in credit could become available if the MBL cap were raised to this level, and this change would also add 108,000 jobs into an economy that is suffering from a very high level of unemployment, all without costs to taxpayers.

In addition, CUNA supports NCUA's recent efforts to improve the regulation of member business lending for credit unions and urges further consideration of MBL regulatory enhancements, as appropriate for well managed credit unions. Absent other considerations, CUNA would support a regulatory approach to MBLs under which the rule only implements the statutory provisions of the FCU Act and other issues, such as loan-to-value ratios, are addressed through guidance or an appendix to the regulation. In any event, CUNA agrees that the agency can and should make clarifications to the MBL rule in a number of areas. As we have stated in the past, these include loan-to-value ratios, loan participations, waivers, and regulatory restrictions generally as they relate to MBLs in order to improve the rule and facilitate lending to small businesses.

Credit Union Services Organizations (CUSOs)

As the financial marketplace continues to evolve, CUNA continues to support a broad range of additional activities for CUSOs to meet the diverse needs of credit unions. Credit unions and CUSOs need flexible regulations to respond by expanding their product and service offerings, consistent with the Federal Credit Union Act (FCU Act). We also urge NCUA to consider a broader list of permissible CUSO activities and to encourage credit unions to utilize additional CUSO services that will add value to their members.

In addition, we recommend NCUA reconsider one aspect of its rules regarding CUSO financial statement audits. As NCUA has indicated, generally accepted accounting principles (GAAP), specifically Accounting Research Bulletin 51, Consolidated Financial Statements, allows a credit union that is the majority owner of a CUSO to procure a consolidated audit.

However, NCUA has limited this to wholly-owned CUSOs. The agency’s reasoning is that this step will help ensure that full disclosure of potential risks is available to prospective minority investors in the CUSO. Under GAAP, subsidiaries generally are fully consolidated if the parent institution holds more than 50% of the subsidiary. We feel that this standard is the proper one to apply in the context of these rules and, therefore, encourage NCUA to permit a consolidated audit for a majority-owned CUSO if the CUSO so chooses.

Fidelity Bond and Insurance Coverage

CUNA generally supported the agency’s last changes in November 2005 to provide the maximum deductible of up to $1 million for credit unions that are qualified under the agency’s Regulatory Flexibility (RegFlex) program and have assets of over $200 million. As we have previously, we also recommend that NCUA employ net worth standards under prompt corrective action to permit, for example, well-capitalized credit unions to qualify for the higher deductible. CUNA also supports a waiver process under which credit unions that no longer qualify for the higher deductible could have more than the 30 days in the proposal to obtain the required coverage.


Requirement of a full assignment of the lease in an indirect leasing arrangement

We believe that credit unions should determine for themselves whether obtaining a full assignment is necessary to protect their interests. The Office of the Comptroller's (OCC) leasing rules do not require full assignment. The OCC rules require a perfected lien and treat the end user lessee as the obligor.

The decision to obtain a full assignment should be based on the credit union’s business practices. Some credit unions may very well decide that a full assignment is the best method to maintain full control of any situation that may arise, especially in the case of default and vehicle disposition.

The 25% unguaranteed residual value limit

Under current leasing rules for federal credit unions (FCUs), the estimated residual value may not exceed 25% of the original cost of the leased property, unless the amount above 25% is guaranteed. The unguaranteed residual value limitation is too restrictive and would place credit unions at a competitive disadvantage with other financial institutions.

We believe that NCUA should adopt a flexible approach. An example is the OCC's approach, which allows banks to invest in operating leases up to an amount of 10% of its assets, without the restriction regarding residual value limits

We believe that NCUA should follow a similar approach and provide more flexibility regarding the residual value limits. Leasing transactions differ based on such factors as the length of the lease term and the property that is involved. The length of the term and the varying rates at which different vehicles depreciate may both affect the decision regarding the appropriate residual value. Credit unions should have discretion to review these factors to make their own determinations, with the assistance of accepted residual leasing guides.

At the May 2000 NCUA Board meeting, the Board voted to retain the 25% threshold but questioned whether this was legally required. We urge NCUA to now revisit this issue and provide more flexibility with regard to this requirement, and we would welcome the opportunity to discuss this issue further.

Incidental Powers

As we have in the past, CUNA urges NCUA to take steps to expand FCUs’ authority to engage in incidental powers. Such steps include:

CUNA also recommends that NCUA approve new incidental activities, which are:

Regulatory Flexibility Program (RegFlex)

In our comment letter, dated May 24, 2010, CUNA strongly opposed NCUA’s proposal to modify the RegFlex program. Specifically, in our view, NCUA's proposal would undermine the RegFlex program, which our members support, by rescinding the exemptions from the following requirements:

We urge that the NCUA Board not adopt the proposal, or at least substantially revise it, before it is approved in final form. NCUA's longstanding RegFlex program allows well-managed FCUs to obtain relief from certain regulatory burdens, and in our view, the program has considerable merit for credit unions as well as for the agency. The program is valuable because it not only encourages credit unions to be well-capitalized, which benefits the entire system, but also promotes regulatory relief - a very important goal considering the range of regulations under which credit unions must operate today and the increasing regulatory burdens they will face this year and into the future.

Under the RegFlex program, eligible FCUs must be well-capitalized with a CAMEL 1 or 2 rating in order to avoid certain regulatory requirements identified in the agency's rules on RegFlex. None of the exemptions relieve FCUs' statutory requirements, but they do provide relief from regulatory directives established and implemented by NCUA.

Although there have been some problems with the RegFlex program, these have been limited to a low number of incidents. We simply do not agree that these small number of problems justify undermining the RegFlex program for all FCUs.

Moreover, the current rule clearly addresses the loss of RegFlex status when a credit union falls below the required net worth level and no longer has a CAMEL 1 or 2 rating. More important, in addressing the individual concerns NCUA has raised, the current rule also allows the NCUA regional director to revoke RegFlex status in whole or in part if the agency has substantive, documented safety and soundness reasons. The regional director must provide written notice to the credit union of the revocation, which is effective upon receipt of the notice.

If the agency feels those provisions are not sufficient, rather than sweeping aside RegFlex authority for all FCUs in the areas identified in the proposal, NCUA should consider whether those provisions should be strengthened, without jeopardizing the program or principles of due process for credit unions. For example, the rule could provide that when RegFlex authority is revoked for a specific safety and soundness issue, despite the credit union’s CAMEL rating or net worth, the credit union must take immediate steps to safeguard against future problems of that nature and document those steps to NCUA. This could be required regardless of whether RegFlex authority is restored or not. The Board could also consider additional capital requirements, such as 8% net worth, and increased safety and soundness measures for credit unions that are reapplying for RegFlex status following a revocation.


The proposal notes that while RegFlex authority would be removed in certain areas, it would preserve the ability of a FCU to request a waiver from certain of requirements on a case-by-case basis. However, the current regulation is not clear on that point and should be amended to address that case-by-case waivers may be obtained and what the process is to apply for them. Also, and more significant, it is our understanding from credit unions that the waiver process is often cumbersome and would not be feasible to use on a regular and ongoing basis as a satisfactory substitute for RegFlex exemptions.

Apart from the proposal, we also urge NCUA to exempt RegFlex eligible credit unions from 12 CFR § 714.4(c) regarding leasing, which requires credit unions to rely on a maximum residual value of 25% for the purpose of meeting the full payout test. This threshold, which is not required by statute, results in credit unions having to purchase costly gap insurance to guarantee recovery of their investments in leased properties with relied- upon residual values that exceed 25%. This increases the cost of providing leasing services to members, and is an expense that other financial institutions are not required to incur, which places credit unions at a competitive disadvantage.

Supervisory Committee Audits and Verifications

CUNA and the credit union system strongly support accuracy and transparency in credit union financial statements and regulatory reports. We believe the current regulations in Part 715 (Supervisory Committee Audits and Verifications) ensure that those statements and reports portray an accurate picture of the financial condition of the institution and no further regulation is warranted at this time. Also, in our view, a regulatory approach that allows credit unions to exercise their business judgment and voluntarily obtain attestations is preferable to unwarranted regulation that mandates such action.


CUNA continues to believe that the requirement to deliver privacy notices in their current form on an annual basis is unnecessary, especially for credit unions that are not required to provide their members with the right to opt-out of certain information-sharing. CUNA also questions whether notices should be required at all if the credit union is not obligated to provide the consumer with the right to opt-out of certain information-sharing.

Fair Credit Reporting (FACT Act)

Over the past several years, numerous rules have been issued under the Fair and Accurate Credit Transactions (FACT) Act. The result has been that substantial new regulatory burdens have been imposed on credit unions, which has been compounded by additional regulations that have been promulgated by NCUA and the other federal financial institution regulators. Just since the beginning of 2008, credit unions and other financial institutions have been subject to new, and very significant, requirements with regard to mortgage lending, credit cards and other types of open-end lending, internet gambling, the Bank Secrecy Act, the FACT Act, gift cards, overdraft protection plans, student loans, and accounting.

In addition, the new Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) will impose even more burdens on credit unions, which were in no way responsible for the financial crisis that this Act is intended to address. These include new limitations on interchange fees, additional collection requirements on consumer loans, new disclosures under the Truth in Lending Act and the Real Estate Settlement Procedures Act, additional disclosure requirements for remittances, and new Home Mortgage Disclosure Act reporting requirements.

Credit unions are not in a position to incur the substantial, additional costs that may be needed if additional software and staff training are required to comply with any new regulatory burdens, especially as many of them are still trying to recover from the current economic crisis.

For this reason, NCUA and all the other federal financial institution regulators, including the new Consumer Financial Protection Bureau (CFPB) that has been created under the Dodd-Frank Act, must carefully review all current rules as a means to reduce unnecessary burdens. We believe additional emphasis in this area should be placed on reducing the cumulative burdens associated with the FACT Act rules. NCUA and the other federal financial institution regulators, under the auspices of the CFPB, should conduct a specific review of the FACT Act rules as soon as possible.

Process for Identifying Rules for Review and Soliciting Comments

As we have stated before, we believe the process for seeking comments on regulations that are included in the agency’s Regulatory Review could be improved. For example, some of the rules included may already be the subject of proposed changes or recent modifications. It is confusing for those rules to be included on the regulatory review list.

Also, the notice for the regulatory review is difficult to find on NCUA’s website. As a result, we are not sure if very many credit unions are aware that the Regulatory Review is underway and that they can comment.

It would be beneficial for NCUA to provide a report on its website each year on how it plans to address the recommendations it receives through this regulatory review comment process. We also recommend NCUA provide an annual synopsis of the comments that were provided to the agency which it did not act on.

Thank you for the opportunity to respond to NCUA’s review. If you have any questions about our letter, please do not hesitate to give me a call at (202) 508-6736.

Mary Mitchell Dunn
CUNA Senior Vice President and Deputy General Counsel