NCUA Board Member Harper Calls for Dedicated Consumer Compliance Exam for Large, Complex CUs

National Credit Union Administration (NCUA) Board Member Todd M. Harper on October 30 is requesting public comment on his proposal to create a dedicated consumer compliance exam program for large, complex credit unions.

The NCUA’s current compliance examinations covering consumer financial protection laws in credit unions with total assets of $10 billion or less differs from other financial institutions regulators. Other regulators complete regularly scheduled, risk-focused consumer compliance reviews and assign a separate consumer compliance rating outside of the CAMEL process for institutions under their jurisdiction.

Harper noted the NCUA’s approach to consumer financial protection reviews also runs counter to the congressionally mandated mission of the Federal Financial Institutions Examination Council, which works to develop uniform standards and processes across all financial institution regulators.

Harper would like to add three new full-time employees in the NCUA’s Office of Consumer Financial Protection in 2020, who would develop and later launch a dedicated consumer compliance examination program for large, complex credit unions.

Read the press.

Substituting a Higher Net Worth Ratio for Risk-Based Capital Requirement

The National Credit Union Administration's risk-based capital rule is very controversial for credit unions and their trade associations.

However, recent legislation may allow the National Credit Union Administration (NCUA) to substitute a higher net worth ratio for the risk-based capital requirement for complex credit unions with less than $10 billion in assets.

A complex credit union has assets of $100 million or more.

This would require combining Section 1790d(c)2 of the Federal Credit Union Act with Section 201 of the newly enacted S. 2155 (Economic Growth, Regulatory Relief, and Consumer Protection Act).

First, Section 201 of S. 2155 requires that the Federal banking agencies establish a community bank leverage ratio of tangible equity to average consolidated assets of not less than eight percent and not more than ten percent. Banks with less than $10 billion in total consolidated assets who maintain tangible equity in an amount that exceeds the community bank leverage ratio will be deemed to be in compliance with capital and leverage requirements. In other words, banks that adopt the heightened leverage ratio would opt out of the risk-based capital requirements.

Second, Section 1790d(c)2 of the Federal Credit Union Act states that if Federal banking agencies increase or decrease the required minimum level for the leverage limit, the NCUA Board may correspondingly adjust one or more of its Prompt Corrective Action net worth ratios in consultation with the Federal banking agencies by an amount equal to, not more than, the difference between the new minimum requirement established by bank regulators and 4 percent of total assets.

If NCUA Board decides to pursue this approach, complex credit unions would be allowed to opt for a higher minimum leverage ratio, which could be 300 to 500 basis points higher depending on the final decision by federal banking regulators, in return they would not longer be subject to NCUA's risk-based capital requirements. Complex credit unions that do not meet the higher net worth requirement would be subject to the current and future net worth regulatory regime.

For example, as of the end of 2017, 917 complex credit unions with less than $10 billion in assets had a net worth ratio of at least 10 percent and 425 complex credit unions had a net worth ratio of at least 12 percent.

This substitution of a higher leverage ratio for a risk-based capital rule would provide regulatory relief to many complex credit unions by simplifying their capital calculations.

Raising the MBL Cap to 17.5 Percent?

There is a lot of wishful thinking in the credit union community that the National Credit Union Administration (NCUA) through regulatory fiat can raise the member business loan (MBL) cap to 17.5 percent for credit unions with more than $100 million in assets.

According to the Federal Credit Union Act (FCUA), the MBL cap is equal to the lesser of—
(1) 1.75 times the actual net worth of the credit union; or
(2) 1.75 times the minimum net worth required under section 1790d(c)(1)(A) of this title for a credit union to be well capitalized.

The minimum net worth ratio to be well capitalized is 7 percent of assets. Seven percent of assets multiplied by 1.75 equals 12.25 percent of assets.

So, where does the 17.5 percent number come from?

Here is where the wishful thinking occurs.

According to the FCUA, complex credit unions are also subject to a risk-based net worth requirement.

However, NCUA is proposing to replace its risk-based net worth requirement with a risk-based capital requirement. The agency will require a complex credit union to have at least a risk-based capital ratio of 10 percent to be well capitalized. Also, NCUA is proposing to define a complex credit union as an institution with more than $100 million in assets.

According to industry advocates, 1.75 times 10 percent translates into a MBL cap of 17.5 percent.

But there are flies in the ointment with regard to this wishful thinking.

The FCUA links the MBL cap to net worth, not capital. Section 1790d(c)(1)(A) of the FCUA talks about risk-based net worth requirements, not risk-based capital requirements. Furthermore, the components in the numerator of the risk-based capital ratio proposal do not align with the statutory definition of net worth. So, there does not appear to be a legal foundation to use the proposed risk-based capital requirement to determine the MBL cap.

But even if you assume NCUA goes forward, there is still a fly in this ointment. The 10 percent risk-based capital requirement is based upon risk weighted assets, not total assets. So, to be consistent, the MBL limit would equal 17.5 percent of risk weighted assets. As a general rule, risk weighted assets are less than total assets. So, it is likely the 12.25 percent MBL cap would still be binding for most, if not all, complex credit unions.

As I said, this is just wishful thinking on the part of credit unions.

Small Credit Unions and Complexity

The NCUA Board is proposing to raise the asset threshold for a small credit union from less than $10 million in assets to less than $30 million in assets. It is also proposing to exclude small credit unions from NCUA’s definition of a complex credit union.

According to the Board, raising the asset threshold from $10 million to $30 million would mean an additional 1,603 federally-insured credit unions (FICUs) would be defined as a small credit union and bring the total number of FICUs covered by the definition to 4,041 or 58 percent of all FICUs.

In addition, 230 out of the 1,603 FICUs would no longer be defined as complex. This means that these 230 FICUs would no longer be subject NCUA's risk-based net worth requirement.

However, there are 409 banks with less than $30 million in assets and they are subject to risk-based capital requirements.

While small credit unions do not pose an undue risk to the National Credit Union Share Insurance Fund (NCUSIF), I believe most people would agree that complex credit unions are engaged in riskier activities than non-complex credit unions. These complex institutions should be expected to hold more capital to offset the risk they pose to the NCUSIF.