NCUA Board Meeting Recap
by Amy Kleinschmit
Chief Compliance Officer
7/31/2020

NCUA Board Meeting

At its recent board meeting the National Credit Union Administration (NCUA) reviewed a number of items, including issuing a final rule regarding its Chartering and Field of Membership (FOM); proposing a rule for transition to CECL methodology; proposing a rule to amend Part 701.6, fees paid by FCUs; and a request for comment regarding overhead transfer rate and operating fee methodologies.

FOM Final Rule

The FOM can be found here and will be effective 30 days after it is published in the Federal Register. The NCUA is amending its FOM rules with respect to applicants for a community charter approval, expansion, or conversion, in response to the 2019 opinion and order issued by the Circuit Court. First, the NCUA is re-adopting the provision to allow an applicant to designate a CSA, or an individual, contiguous portion thereof, as a well-defined local community, provided that the chosen area has a population of 2.5 million or less. Second, with respect to communities based on a CBSA or a portion thereof, the NCUA is providing additional explanation and support for its decision to eliminate the requirement to serve the CBSA’s core area, as provided for in the 2016 Final Rule. Consistent with the Circuit Court decision, the NCUA is clarifying existing requirements and adding an explicit provision to its rules regarding potential discrimination in the FOM selection for CSAs and CBSAs.

Transition to CECL Methodology – Proposal

This proposed rule can be found here and is open for a 60 day comment period. FASB established a staggered effective date for CECL. FICUs are required to commence implementation of the standard for fiscal years beginning after December 15, 2022.

As summarized by the NCUA, this proposed rule would provide that, for purposes of determining a federally insured credit union’s (FICU’s) net worth classification under the prompt corrective action (PCA) regulations, the NCUA will phase-in the day-one adverse effects on regulatory capital that may result from the adoption of the CECL accounting methodology.

Upon adoption of CECL, an institution will record a cumulative-effect adjustment to retained earnings (known as “the day-one adjustment”). The day-one adjustment will be equal to the difference, if any, between the amount of credit loss allowances required under the incurred loss methodology and the amount of credit loss allowances required under CECL.

The proposed rule would provide that, for purposes of the PCA regulations, the NCUA will phase-in the day-one effects on a FICU’s net worth ratio over a three-year period (12 quarters). The phase-in would only be applied to those FICUs that adopt the CECL methodology on or after December 15, 2022. FICUs that elect to adopt CECL earlier than the deadline established by FASB would not be eligible for the phase-in. Also, eligible FICUs would not have the choice of opting into (or out of) the phase-in. Rather, the NCUA will apply the phase-in for all FICUs that meet the prescribed eligibility criteria.

Under this proposed rule, FICUs with less than $10 million in assets would no longer be required to determine their charges for loan losses in accordance with GAAP. Instead, the NCUA’s regulations would allow these FICUs to make charges for loan losses in accordance with any reasonable reserve methodology (incurred loss), provided that it adequately covers known and probable loan losses. However, state-chartered, federally insured credit unions subject to state laws and regulations may still be required to comply with GAAP or other accounting standards under applicable state requirements.

Part 701.6 Fees Paid by FCUs - Proposal

This proposed rule can be found here and is open for a 60 day comment period. This proposal would amend the annual operating fee assessed to FCUs. To summarize this proposal, it would amend § 701.6(a) by excluding PPP loans from the FCU’s total assets for purposes of calculating its operating fee. Participating FCUs would continue to report their assets in the quarterly Call Report, but for purposes of determining the operating fee, the NCUA will exclude reported PPP loans in the calculation of total assets. The NCUA is proposing to add regulatory language that would contemplate exclusion of assets under similar programs without requiring references to the specific program in the regulation. The NCUA anticipates making exclusions of similar future programs by issuing an order, which may be published in a letter to FCUs or a similar notice.

The proposed rule would amend § 701.6(a) to use the average of FCUs’ four most-recently reported quarterly assets to calculate operating fees and to make conforming amendments to the regulatory text to ensure this same approach is applied to merged and recently converted FCUs. Currently, total assets are calculated using the FCU’s December 31st Call Report of the preceding year. As explained by the NCUA, it believes the four-quarter average is more equitable on the whole because it can account for seasonal share account fluctuations that some FCUs experience based on the characteristics and transaction patterns engaged in by their fields of membership.

OTR and Operating Fee Methodologies

Finally, the NCUA is inviting comments on its methodology used to determine the OTR. This request for comment can be found here and is open for a 60 day comment period. The NCUA proposes: (1) clarifying the treatment of capital project budgets when calculating the operating fees; (2) clarifying the treatment of miscellaneous revenues when calculating the operating fees; and (3) modifying the approach for calculating the annual inflationary adjustments to the thresholds for the operating fee rate tiers. The NCUA also solicits comments on several questions discussed in the proposal to gather information on potential future enhancements to the methodology.

As always, CUAD members may contact Amy Kleinschmit with any compliance related questions.

 

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