NCUA Lifts Small Credit Union Definition to $50 Million to Ease Regulatory Burdens

Board Action Bulletin

Board Also Extends Low-Income Credit Union Acceptance Deadline and Finalizes “Troubled Condition” Regulation

ALEXANDRIA, Va. (Jan. 10, 2013) – The National Credit Union Administration (NCUA) Board convened its first scheduled open meeting of 2013 at the agency’s headquarters here today. The Board unanimously approved five items:

• A final rule to provide more than two-thirds of credit unions with regulatory relief by raising the definition of a “small entity” from credit unions with assets of less than $10 million to credit unions with assets of less than $50 million.

• A final rule extending the eligible credit unions’ deadline for accepting a low-income designation from 30 to 90 days following notification of eligibility by NCUA.

• A final rule refining the process of declaring a credit union in “troubled condition” to enhance NCUA’s ability to protect the Share Insurance Fund from future losses.

• A final rule making technical changes to bring share insurance coverage for certain types of accounts in line with the permanent $250,000 maximum limit.

• The 2013 Annual Performance Plan to establish NCUA’s goals and priorities. 

The Board also received a staff briefing on a forthcoming joint agency final rule about appraisal requirements for higher-priced mortgages as required by the Dodd-Frank Act.

Over 4,600 Credit Unions Now Covered under Updated “Small Entity” Definition

The Board took a major step in support of easing the regulatory burdens of small credit unions by approving a final rule (Parts 702, 741 and 791) to amend the definition of “small entity” from the current threshold of less than $10 million in assets to less than $50 million in assets.

“Small credit unions are essential to their communities and fill a niche other financial institutions can’t,” NCUA Board Chairman Debbie Matz said. “So, at NCUA we’re regularly searching for ways to help small credit unions thrive and succeed. Consistent with our Regulatory Modernization Initiative, this final rule nearly doubles the number of small credit unions receiving regulatory relief.

“This final rule is also an excellent example of how NCUA listens carefully during the rulemaking process. Last fall, we proposed a new asset threshold of less than $30 million. After reviewing the comments received, we conducted further analysis and determined that we could raise the threshold to cover credit unions with less than $50 million in assets without significantly affecting industry safety and soundness.”

The Regulatory Flexibility Act generally requires federal agencies to determine and consider the effect of proposed and final rules on small entities. Under the revised definition for a “small entity,” 2,270 more federally insured credit unions will now receive special consideration for regulatory relief. The updated threshold almost doubles the number of federally insured credit unions with regulatory exemptions through the small credit union definition. In all, the final rule covers 4,672 or 67.8 percent of federally insured credit unions.

The final rule provides regulatory relief in several ways. First, the rule excludes more credit unions from the risk-based net worth requirements under NCUA’s Prompt Corrective Action rule. Second, all credit unions with less than $50 million in assets will now be exempt from the requirement to adopt and implement interest rate risk policies. Finally, the NCUA Board will need to use the new threshold when issuing proposed and final rules in the future, such as the pending rule on emergency liquidity, to determine whether to exempt small credit unions from a rule’s requirements or to modify the rule to address the needs of small credit unions.

Additionally, the final rule makes more credit unions eligible for assistance from NCUA’s Office of Small Credit Union Initiatives. The office is redesigning its service delivery system to improve efficiency and handle the potential increase in demand without increasing staff.

The final rule is the first time in 10 years NCUA has revised the small credit union definition. Under the final rule, NCUA will review the threshold again in two years and then every three years as part of the rolling review process of all NCUA regulations.

Matz additionally noted that NCUA last year implemented a streamlined examination process for credit unions with less than $10 million in assets and a CAMEL rating of 1, 2 or 3. NCUA’s Office of Examination and Insurance is studying whether to develop a modified examination program for credit unions with assets between $10 million and $50 million.

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

Credit Unions Get More Time to Accept Low-Income Designation

Eligible credit unions considering accepting the low-income designation will now have more time to determine if they wish to do so, following the Board’s vote to amend the low-income credit union rule (Section 701.34) to extend the acceptance deadline from 30 to 90 days.

“Last August, NCUA announced an initiative to inform more than 1,000 federal credit unions of their eligibility for the low-income designation. To date, more than 800 credit unions have accepted,” Matz said. “But some federal credit unions said the 30-day deadline for responding did not give them sufficient time to evaluate the benefits of having the designation, determine if the designation would be consistent with their strategic plans, and obtain approval from their boards. So, we’ve now acted to extend the deadline to 90 days.”

The Board’s action is part of NCUA’s ongoing efforts to streamline, modify, expand or repeal existing regulations to make them more effective and less burdensome, following Executive Order 13579. NCUA reviews regulations on a three-year cycle to improve the regulatory system.

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

Modified “Troubled Condition” Procedures Protect Share Insurance Fund

To potentially save credit unions hundreds of millions of dollars in future Share Insurance Fund premiums, the Board approved a final rule (Part 701) permitting either NCUA or a state regulator to designate a federally insured, state-chartered credit union in “troubled condition.”

This designation acts as an early warning system for those credit unions most likely to cause losses to the Share Insurance Fund. A troubled condition exists when a credit union is assigned a composite CAMEL rating of 4 or 5.

Previously, only a state regulator could make the “troubled condition” designation for a federally insured, state-chartered credit union, even if NCUA assigned a lower rating.

Since 2008, four federally insured, state-chartered credit unions failed after NCUA more timely assigned a “troubled condition” rating than the state regulator. These failures caused $235 million in Share Insurance Fund losses, 25.5 percent of the Fund’s losses over the last five years.

“The dual chartering system works well, and in the vast majority of cases, NCUA and state regulators have successfully worked together to prevent credit union failures,” Matz noted. “But in a few instances, sizable losses have occurred. NCUA’s Inspector General and the Government Accountability Office have concluded that we need to act sooner to prevent losses when a troubled condition is detected. Having two sets of vigilant regulators, with equal ability to make decisions about when to designate a troubled condition, will better protect all credit unions.”

Under the final rule, NCUA must make an onsite contact at the federally insured, state-chartered credit union before issuing the “troubled condition” designation. To promote cooperation, NCUA must also consult with the appropriate state regulator before issuing the downgrade. NCUA will continue to defer to the state regulator in any case where a state designates a credit union as troubled, even if NCUA did not rate the same credit union as troubled.

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

Technical Changes to Increase Share Insurance Coverage Approved

The Board approved a final rule (Section 701.37) making technical amendments to the agency’s regulations about maximum share insurance coverage on various kinds of Treasury accounts.

The Dodd-Frank Act amended the Federal Credit Union Act to make permanent an increase in the standard maximum share insurance amount from $100,000 to $250,000. The final rule conforms NCUA’s rules for Treasury accounts to the current share insurance maximum.

The final rule will become effective immediately upon publication in the Federal Register.

As in 2012, NCUA’s four strategic goals for 2013 are to:

• Ensure a safe, sound and healthy credit union system;

• Promote credit union access to all eligible persons;

• Develop further a regulatory environment that is transparent and effective, with clearly articulated and easily understood regulations; and

• Cultivate an environment that fosters a diverse, well-trained and motivated staff. 

The plan also includes two priority goals for 2013 and 2014:

• Monitor and control risk in consumer credit unions, as measured by net worth growth in the consumer credit union system, the long-term assets ratio, and a reduction in Share Insurance Fund losses as a percentage of total insured shares; and

• Dedicate appropriate resources to staff and train the new Office of National Examinations and Supervision to assume responsibility for the largest consumer credit unions in 2014.

New Joint Rule on Appraisals for Higher-Priced Mortgages Discussed

The Board received a briefing from the Office of General Counsel and the Office of Examination and Insurance on an upcoming joint agency final rule on appraisals for higher-priced mortgages (Part 722) required by the Dodd-Frank Act.

NCUA and five other regulatory agencies are jointly publishing final rules to amend regulations under the Truth in Lending Act. These rules implement new requirements on appraisals for higher-priced mortgages. For mortgages with an annual percentage rate exceeding the prime rate by a specified percentage, the final rule will require creditors to obtain an appraisal or appraisals meeting certain specific standards, provide applicants with notification about the use of the appraisals, and give applicants a copy of the appraisal.

Each agency is now working through its individual process for approving the final rule. The NCUA Board anticipates taking a notation vote on the final rule in the near future. After all six agencies approve the final rule, a notice will appear in the Federal Register. To provide higher-cost mortgage lenders with sufficient time to implement the changes, the final rule will be effective January 2014.

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