Federal Regulators Issue Guidance on Responsible Small-Dollar Lending

To encourage depository institutions to engage in responsible small-dollar lending, federal financial regulators on May 20 issued long-awaited joint guidance for offering these types of loans to consumers and small businesses.

“Well-designed small-dollar lending programs can result in successful repayment outcomes that facilitate a customer’s ability to demonstrate positive credit behavior and transition into additional financial products,” the agencies noted. They added that these programs should be developed in accordance with sound risk management principles.‌‌

When making small-dollar loans, the agencies said that lenders may underwrite loans using internal or external data sources, such as deposit account activity, to assess a customer’s creditworthiness, effectively manage risk, and lower the cost of providing responsible small-dollar loans.

Lenders also should ensure that they comply with all applicable laws and regulations, including fair lending laws, the agencies said. Other core lending principles include effectively managing the risks associated with the products offered and underwriting small-dollar products based on prudent policies and practices. These policies and practices should generally address loan structures, pricing, underwriting, marketing and disclosures, along with servicing and safeguards for customers who may find themselves experiencing stress or unexpected circumstances.

The guidance was issued by the Federal Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency.

Read the joint principles.

Regulators Encourage Mortgage Servicers to Work with Homeowners Affected by COVID-19

Financial regulators on April 3 issued a joint policy statement granting flexibility to mortgage servicers to work with borrowers struggling as a result of the coronavirus pandemic. Under the CARES Act, servicers are required to grant payment forbearances to impacted borrowers for up to 180 days, and possibly longer.

The agencies confirmed that these forbearance offers are exempt from certain loss mitigation procedural requirements and servicers do not need to obtain a complete application before offering CARES Act forbearance to a borrower. The agencies also said that they would not penalize servicers for failing to provide the required notice of acknowledgement to borrowers who submit incomplete applications within the five-day timeframe described in the servicing rules, provided that the notice is given before the end of the forbearance period. The agencies also said that they would not penalize servicers for failing to provide other loss mitigation notices and outreach efforts, so long as servicers demonstrate good-faith efforts to comply “within a reasonable timeframe.”

Finally, the agencies said they would not take action against servicers for delays in sending annual escrow statements, provided the servicers demonstrate good-faith efforts to comply “within a reasonable timeframe.” In addition to the statement, the CFPB offered further clarification in a set of frequently asked questions regarding compliance with the servicing rules during the COVID-19 emergency

Read more.

Agencies Encourage Banks and CUs to Engage in Responsible Small-Dollar Lending

The federal financial regulators on March 26 issued a joint statement urging financial institutions to offer “responsible small-dollar loans to both consumers and small businesses.” Such offerings should be made in accordance with safe and sound banking practices, and should ensure fair treatment of consumers and comply with applicable statutes and regulations, including consumer protection laws, the agencies said.

“The current regulatory framework allows financial institutions to make responsible small-dollar loans. Such loans can be offered through a variety of loan structures that may include, for example, open-end lines of credit, closed-end installment loans, or appropriately structured single payment loans,” the agencies said. “For borrowers who experience unexpected circumstances and cannot repay a loan as structured, financial institutions are encouraged to consider workout strategies designed to help enable the borrower to repay the principal of the loan while mitigating the need to re-borrow.”

The agencies also signaled that they plan to issue additional guidance on small-dollar loans to help banks and credit unions continue to meet the needs of customers who may be facing extreme financial hardships.

Read the letter.

Agencies Provide Guidance on Loans Modified Due to COVID-19

Loan modifications for borrowers affected by the coronavirus pandemic will not generally be required to be treated as troubled debt restructurings (TDRs), federal financial institution agencies and state banking regulators said on March 22.

The agencies said they had confirmed with FASB staff that “short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.” This includes short-term modifications like payment deferrals, fee waivers and repayment term extensions.

Meanwhile, the agencies said that examiners will “exercise judgment” in reviewing loan modifications and “not automatically adversely risk rate credits that are affected by COVID-19,” including those that are designated as TDRs.

The guidance also addresses past-due reporting, nonaccrual status, charge-offs, and the eligibility of modified loans as discount window collateral.

Read the interagency statement.

NCUA's Harper: NCUA's Consumer Compliance Oversight Lacks Robustness

In an opinion piece appearing in CU Today, National Credit Union Administration (NCUA) Board Member Todd Harper wrote that customers of a bank acquired by a credit union will not have the same level of consumer financial protection oversight in their new credit union.

He pointed out in the column that the Federal Deposit Insurance Corporation (FDIC) has a more robust consumer compliance program than NCUA.

He noted that FDIC regularly conducts dedicated consumer compliance reviews that are separate and apart from safety and soundness exams, while NCUA with the exception of fair lending exams combines consumer compliance exams as part of the agency's safety and soundness exams performed NCUA's regional offices.

The agency has only budgeted for 30 fair lending examines in 2020. Also, the consumer compliance exams conducted by NCUA's regional offices will only cover some of the many consumer financial protection laws on the books.

He further stated that the agency has only 15 or so regional examiners, who are consumer compliance subject matter experts. In comparison, the FDIC has hundreds of examiners committed to performing these exams.

Despite his reservations about the agency's consumer compliance oversight gap, he still supports the agency's proposed rule on combination transactions.

Read the opinion piece.

NCUA Should Seek Feedback on CAMEL Ratings

The National Credit Union Administration (NCUA) should seek feedback from credit unions and other stakeholders concerning the current use of CAMEL ratings by the agency.

The Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System are currently seeking feedback on how the agencies use their CAMELS ratings in enforcement action and application processes.

The two banking agencies stated that this effort is consistent with the agencies' commitment to increase transparency, improve efficiency, support innovation, and provide opportunities for public feedback.

For example, the two banking regulators are looking for input on the extent that they appropriately communicate and support each rating after an on-site examination or at the end of an examination cycle, including communicating the effect of each rating or finding on the composite rating.

The bank regulators are also interested in how the CAMELS rating system vary from one examination, or examination cycle, to the next.

Bank regulators want to know whether the CAMELS rating system is sufficiently flexible to reflect differences between financial institutions such as size, business models, risks, and internal and external operating environments.

Another area that bank regulators want input on is steps, if any, the agencies should take to promote the consistent use of CAMELS ratings in applications and enforcement matters.

These are just some of the topics that the bank regulators are seeking feedback on.

NCUA would benefit from receiving this feedback from stakeholders on its use of CAMEL ratings.

Read the Federal Register notice.

NCUA Should Propose the Equivalent of the Community Bank Leverage Ratio

On June 20, 2019, the National Credit Union Administration (NCUA) Board delayed the effective date of the agency’s risk-based capital rule to January 1, 2022.

The delay was meant to provide the NCUA Board time to consider additional improvements to credit union capital standards, including the equivalent of a community bank leverage ratio for credit unions.

On September 17, the Federal Deposit Insurance Corporation finalized the community bank leverage ratio rule.

The final rule implements a section of the S. 2155 regulatory reform law that directed the agencies to set a community bank leverage ratio between 8 percent and 10 percent.

Under the final rule, banks with less than $10 billion in assets may elect the community bank leverage ratio framework if they meet the 9 percent ratio and if they hold 25 percent or less of assets in off-balance sheet exposures, and 5 percent or less of assets in trading assets and liabilities.

Community banks with a leverage capital ratio of at least 9 percent will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.

The final rule has a two-quarter grace period for a qualifying community bank that fails to meet any of the qualifying criteria. For example, if the leverage ratio slips under 9 percent, but remains above 8 percent, the community bank will be deemed to be well-capitalized during the grace period. However, there is no grace period for a community bank if its leverage ratio falls below 8 percent.

The final rule goes into effect on January 1, 2020.

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.

The NCUA Board should use its authority to issue a proposed rule this year that is equivalent to the community bank leverage ratio.

By doing so, strongly capitalized, complex credit unions could elect to receive regulatory relief from the agency's risk-based capital rule.

Read more.

Banks: Credit Unions Are the Chief Nonbank Competitor for Small Business Loans

A survey on Small Business Lending by the Federal Deposit Corporation found that credit unions were the primary nonbank competitor to banks for small business loans.

According to survey responses, both small and large banks (52.3 and 55.0 percent) reported frequent competition with credit unions with regard to small business lending.

The report defined banks with less than $10 billion in assets as small, and banks with at least $10 billion in assets as large.

According to the report, small banks were more concerned than large banks about credit union competition.

Nearly one-third (34.1 percent) of small banks viewed credit unions as a top three competitor, compared with only 12.2 percent of large banks.

Among small banks, those with less than $250 million in assets were about twice as likely as those with $1 billion to $10 billion in assets to view credit unions as a top three competitor (39.0 percent compared with 19.1 percent).

Only 4.5 percent of small banks stated that a credit union was their number one competitor with respect to small business loans.

For banks that identify credit unions as their number one competitor, the top perceived advantages of credit unions dealt with pricing (85.1 percent) and, to a lesser extent, other elements of loan structure. The report noted that the credit union pricing advantage arises from their preferential tax status.

Read the report.

Commercial Bank and Credit Union Failures

A paper by Luis G. Dopico and James A. Wilcox examines the failures of credit union and commercial bank failures.

Between 1980 and 2016, more credit unions failed than commercial banks -- 2,165 versus 1,904. But the paper noted that credit unions had a slightly lower annual failure rates than commercial banks, averaging 0.44 percent for credit unions versus 0.48 percent for commercial banks over the same time period.

However, going back to 1971, the annual failure rate for credit unions was higher than the failure rate for commercial banks.

The study found that the rate of bank and credit union failures varied over time between 1980 and 2016. During the time periods of 1980 and 1986, 1994 - 2007, and 2014 - 2016, credit unions had a higher failure rates than commercial banks. But during 1987 - 1993 and 2008 - 2013, bank failure rates exceeded credit union failure rates.

The paper noted that the National Credit Union Share Insurance Fund had a lower loss rate per insured deposits than the Federal Deposit Insurance Corporation.

The paper stated that many of the reasons associated with the failure of commercial banks were also present with the failure of credit unions. Both credit unions and commercial banks that failed had more commercial mortgages, fewer assets, more delinquent loans, higher noninterest expenses, less capital, and lower return on assets (ROAs).

The authors also found the following differences in bank and credit union failures. "Having more residential mortgages signaled more failures of credit unions, but not of banks. Conversely, having more commercial and industrial (C&I) loans and higher local unemployment rates signaled more failures of banks, but not of credit unions."

The paper further pointed out that many credit union failures are not related to historical financial conditions; but rather due to largely idiosyncratic reasons, such as sponsor failures, poor record keeping, etc.

Read the paper.

GAO: Regulators Failing to Assess Cumulative Burden of Rules on CUs and Community Banks

The Government Accountability Office (GAO) found that depository institution regulators fail to assess the cumulative burden of all rules imposed on community banks and credit unions.

The GAO conducted interviews and focus groups with over 60 representatives from community banks and credit unions regarding the most burdensome regulations.

These representatives identified regulations for reporting mortgage characteristics, reviewing transactions for potentially illicit activity, and disclosing mortgage terms and costs to consumers as the most burdensome.

GAO was told that these regulations were time-consuming and costly to comply with, in part because the requirements were complex, required individual reports that had to be reviewed for accuracy, or mandated actions within specific timeframes.

GAO made 10 recommendations to the Consumer Financial Protection Bureau (CFPB) and the four depository institution regulators.

GAO recommended that the CFPB "assess the effectiveness and guidance on mortgage disclosure regulations and publicly issue its plans for the scope and timing of its regulation reviews and coordinate these with other regulators' review process."

In addition as part of their regulatory burden reviews, the depository institution regulators should develop plans to report quantitative rationales for their actions and addressing the cumulative burden of regulations.

Read the report.

Treasury Recommendations Could Impact Credit Unions and NCUA

The United States Department of the Treasury (Treasury) released on June 12th a report, A Financial System that Creates Economic Opportunities, on reforming the financial sector regulatory framework.

The report makes a number of regulatory and legislative recommendations that could impact credit unions and the National Credit Union Administration (NCUA).

First, Treasury recommended that Congress take action to reduce fragmentation, overlap, and duplication in the U.S. regulatory structure. This could include consolidating regulators with similar missions and more clearly defining regulatory mandates. For example, this could involve merging the NCUA with other federal banking regulators or merging the National Credit Union Share Insurance Fund with the Federal Deposit Insurance Corporation.

The report noted that the following two recommendations can be implemented by NCUA regulation.

• Treasury recommendeds raising the asset size threshold for stress-testing requirements for federally-insured credit unions from its current level of $10 billion in assets to $50 billion in assets. This would mean only one credit union, Navy Federal Credit Union, would be subject to stress-testing.
• Treasury believed that NCUA should revise its risk-based capital requirements to only apply to credit unions with total assets in excess of $10 billion or eliminate altogether risk-based capital requirements for credit unions satisfying a 10 percent simple leverage (net worth) requirement. Treasury noted that if the asset threshold for the risk-based capital requirement is raised to $10 billion in assets, it would support allowing such credit unions to rely in part on appropriately designed supplemental capital to meet a portion of their risk-based capital requirements. If NCUA eliminates the risk-based capital rule, then the agency does not need to pursue its supplemental capital proposal.

Treasury notes that if supplemental capital is made available to all credit unions to meet their net worth leverage ratio, this action would require Congressional action.

As with banks, credit unions should be granted relief from the current level, design, and lack of notice and transparency of the supervision and examination processes. Examination should be more tailored and cost efficient to avoid burdensome and unnecessary procedures. This would require coordination between NCUA, CFPB, and state regulators. Procedures that are redundant between regulators should be streamlined.

Moreover, Treasury recommends that Congress raise the asset threshold for small banks and credit unions to be eligible for an 18-month examination cycle.

Treasury believes that a significant restructuring in the authority and regulatory responsibilities of the Consumer Financial Protection Bureau (CFPB) is necessary. The report notes that the CFPB's unaccountable structure and unduly broad regulatory powers have led to predictable regulatory abuses and excesses. Treasury stated the CFPB has hindered consumer access to credit, limited innovation, and imposed unduly high compliance burdens, particularly on small institutions.

Treasury’s recommendations include: making the Director of the CFPB removable at will by the President or, alternatively, restructuring the CFPB as an independent multi-member commission or board; funding the CFPB through the annual appropriations process; adopting reforms to ensure that regulated entities have adequate notice of CFPB interpretations of law before subjecting them to enforcement actions; and curbing abuses in investigations and enforcement actions.

The CFPB’s Consumer Complaint Database should be reformed to make the underlying data available only to federal and state agencies, and not to
the general public.

Treasury recommended raising the total asset threshold for making Small Creditor Qualified Mortgage loans from the current $2 billion to a higher asset threshold of between $5 and $10 billion to accommodate loans made and retained by small depository institutions.

In addition, Treasury is recommending that the CFPB delay the 2018 implementation of the new Home Mortgage Disclosure Act reporting requirements until borrower privacy is adequately addressed and the industry is better positioned to implement the new requirements. The new requirements should be examined for utility and cost burden, particularly on smaller lending institutions.

Treasury recommended that Congress repeal Section 1071 of the Dodd-Frank Act. Section 1071 requires the CFPB to establish regulations and issue guidance for small business loan data collection. The purposes of section 1071 include enabling creditors to identify the needs of small, minority-owned, and women-owned businesses, and to facilitate enforcement of fair lending laws.

Read the report.

Report: AMAC Can Improve Restitution Process

The National Credit Union Administration's Office of the Inspector General (IG) earlier this month released a report critical of the restitution process of the Asset Management and Assistance Center (AMAC). The report points out that AMAC management was not maximizing restitution recovery opportunities.

As of December 11, 2014, AMAC accounted for 117 restitution orders totaling approximately $334 million.

The IG determined that "AMAC management could improve the restitution orders process by following up and assisting the Department of Justice (DOJ) to potentially improve collections and confirm accuracy when accounting for restitution orders owed to liquidation estates."

The report noted that AMAC management does not assist the DOJ through systematic follow-up regarding the status of offenders and receipt of payments. For example, AMAC does not take advantage of an available federal resource for assistance with the collection of restitution orders or conduct periodic reconciliations with the DOJ on the number of restitutions ordered and the amount of restitution owed to liquidation estates.

AMAC management offered numerous explanations as to why they do not regularly assist the DOJ in restitution collection efforts, including lack of resources at AMAC, uncertain earnings of most criminals after release from prison, and little or no return on investment.

However, the IG disagreed with AMAC management's excuses. The IG found that AMAC does very little to proactively pursue monies owed to the NCUA, but rather relies on the DOJ to forward additional restitution payments.

The report benchmarked AMAC's restitution process to the practices of the Federal Deposit Insurance Corporation (FDIC). The report states that FDIC has a robust restitution program and found that FDIC with the assistance of the Financial Litigation Unit at DOJ actually collect more restitution after the completion of an offender’s prison term. According to the report, FDIC monitors an offender throughout the life of the restitution and regularly conducts asset searches, searches for property, and any fraudulent conveyances, particularly after the offender is released, not just before sentencing during the prosecution phase.

In addition, the report recommends that AMAC explore working with the Treasury Offset Program, which has resulted in an additional $35.6 million in collections for FDIC between 2009 and 2013.

Read the report.

Florida Regulator Approves Merger of Calusa Bank into Achieva CU

The Florida Office of Financial Regulation approved the merger of Calusa Bank (Punta Gorda, FL) into Achieva Credit Union (Dunedin, FL).

The order requires the consent of the National Credit Union Administration and the Federal Deposit Insurance Corporation.

Also, within six months after consummation of the merger and consolidation of assets and liabilities into Achieva, the Office of Financial Regulation is to be provided written documentation to verify that all existing depositors or borrowers of Calusa at the time of consummation of the transaction have either opted-in to become a member of Achieva or their account relationship has been moved to another financial institution, closed or paid off.

Read the order.

IOLTA Bill: Minimal Budget Impact

H.R. 3468, Credit Union Share Insurance Parity Act, would have an insignificant impact on the budget deficit over the next 10 years, according to the Congressional Budget Office (CBO).

Currently, Interest on Lawyer Trust Accounts (IOLTAs) are not insured by the National Credit Union Share Insurance Fund (NCUSIF). However, IOLTAs receive federal deposit insurance through the Federal Deposit Insurance Corporation (FDIC). H.R. 3468 would extend federal deposit insurance to include IOLTAs and similar escrow accounts housed within credit unions.

CBO notes that "enacting this legislation would increase the cost to the government of resolving some future credit union failure." However, those costs would be minimal and offset by other collections. In addition, CBO points out that any increase in costs to the NCUA would be offset by a decrease in costs to the FDIC as IOLTAs move from FDIC-insured banks to NCUSIF-insured credit unions.

Read CBO's analysis.

Reforming the NCUSIF Is a Legislative Priority for NCUA

In its draft 2014 - 2017 Strategic Plan, the National Credit Union Administration (NCUA) identified one of its legislative priorities as "[i]mproving NCUA’s ability to manage the NCUSIF by providing more flexibility in setting the normal operating level and building retained earnings for the NCUSIF in a manner consistent with the size and complexity of the credit union industry and financial stability goals."

The Federal Credit Union Act defines the normal operating level as an equity ratio specified by the Board, which shall be not less than 1.2 percent and not more than 1.5 percent. The NCUA Board is currently setting the normal operating level at 1.30 percent of insured deposits (shares).

NCUA is also required distribute excess funds from the NCUSIF, if the NCUSIF equity ratio is greater than the normal operating level and the available assets ratio is above 1 percent. This assumes that all borrowings from the Federal government had been repaid with interest.

But what does it mean to provide more flexibility in setting the normal operating level and to build retained earnings for the NCUSIF in a manner consistent with the size and complexity of the credit union industry?

The Strategic Plan unfortunately does not provide any details.

While I don't know what NCUA intends to propose, recent legislative and regulatory developments dealing with the FDIC Deposit Insurance Fund (DIF) may provide some guidance.

The Dodd-Frank Act set a minimum Designated Reserve Ratio for the DIF at 1.35 percent of insured deposits (the former minimum was 1.15 percent). The Dodd-Frank Act also removed the upper limit on the Designated Reserve Ratio, which had been capped at 1.50 percent. This effectively removed any limit on the size of the DIF. In addition, the Dodd-Frank Act eliminated the requirement that FDIC provide dividends from the DIF when the reserve ratio was between 1.35 percent and 1.50 percent and gave the FDIC Board the sole discretion in determining to pay dividends if the DIF reserve ratio was at least 1.50 percent.

With no cap on the DIF Designated Reserve Ratio, the FDIC Board in December 2010 adopted a final rule setting the minimum Designated Reserve Ratio at 2 percent. In addition, the FDIC Board in February 2011 decided to indefinitely suspend the payment of dividends.

While you may not agree with this outcome, I would contend that there are strong incentives for NCUA officials to pursue a similar path. NCUA officials are risk-averse. The last thing NCUA officials want is to go to Congress requesting assistance like they did in 2009 regarding the corporate credit union debacle. By increasing the size of the NCUSIF fund, this would lower the probability of future congressional assistance.

ASI and Federal Home Loan Bank Advances

H.R. 3584 would permit privately insured credit unions to join a Federal Home Loan Bank. But what needs to be discussed is the financial viability of a private insurer to a failure of a non-federally-insured credit union with a significant level of secured advances from a Federal Home Loan Bank (FHLB).

Advances provided by the FHLBs are secured and have priority in any financial institution failure. In other words, the interest of deposit insurers -- whether the Federal Deposit Insurance Corporation (FDIC), National Credit Union Share Insurance Fund (NCUSIF), or American Mutual Share Insurance (ASI) -- are subordinated to the claims of FHLBs, which means greater losses for deposit insurers in a failure.

In fact, the FHLB system has never lost a penny on advances in its history.

However, there are major differences between both federal deposit insurers and ASI. Both the FDIC or NCUSIF have large and geographically diversified memberships; but also have the full faith and credit backing of the Federal government.

On the other hand, ASI has a small number of state chartered credit unions as members and lacks geographic diversification. There are 137 privately insured credit unions as of June 30th located in 9 states with almost 95 percent of the deposits of privately insured credit unions concentrated in five states. In addition, ASI does not have any federal backing.

Given ASI's limited resources, a failure of any institution with an exposure to FHLB advances would likely have a significantly larger impact on ASI relative to losses faced by the FDIC or NCUSIF. The cost of such a failure would be difficult for privately insured credit unions to absorb, given the small pool of privately-insured credit unions.

A Tale of Two Regulators

If you want to observe a difference between FDIC and NCUA, you only need to look at how the two agencies handled the pending expiration of Transaction Account Guarantee program, which is set to expire on December 31, 2012.

FDIC notified banks on November 5 about the pending expiration of the program. Banks were to give adequate advance warning to noninterest bearing transaction account depositors about the pending change in insurance coverage. FDIC also provided model language which could be shared with these depositors.(read the letter)

On the other hand, NCUA waited until the third week of December to send a letter to federally-insured credit unions about the expiration of the Transaction Account Guarantee program. NCUA wrote that credit unions should communicate to thier membership about the potential changes in insurance coverage occurring on January 1, 2013. This hardly strikes me as providing credit union members with adequate advance warning, especially if credit unions start having this conversation with their members between now and the December 31 (hopefully credit unions had already communicated this change in insurance coverage before receiving NCUA's letter). (read the letter)

Two Nominations -- A Study in Contrast

President Obama's nominees to serve on the FDIC Board versus the NCUA Board are a study in contrast.

President Obama nominated Thomas Hoenig to serve as the Vice Chairman of the FDIC Board. Dr. Hoenig was the President and Chief Executive Officer of the Federal Reserve Bank of Kansas City from 1991 to 2011. Dr. Hoenig first joined the Federal Reserve Bank of Kansas City in 1973 as an economist in the banking supervision area.

On the other hand, the President nominated Carla M. León-Decker for the NCUA Board. Ms. León-Decker is the President and CEO of the D.C. Federal Credit Union. From 1994 to 2000, she served at the PAHO/WHO Federal Credit Union, initially as Operations Manager and later as President and CEO. Before that, she was a branch manager at the Transportation Federal Credit Union where she served from 1988 to 1994. Ms. León-Decker is a credit union development educator and Co-Founder and Director of the Network of Latino Credit Unions & Professionals.

Tom Hoenig has a strong background as a bank regulator, while Carla León-Decker has no regulatory experience.

NCUSIF Assessments Will Be More Pro-Cyclical Than FDIC Assessments

During yesterday's Federal Deposit Insurance Corporation (FDIC) Board meeting, the FDIC stated that assessments for banks will be less pro-cyclical under its new system than assessments under the National Credit Union Share Insurance Fund (NCUSIF) system.

FDIC was responding to issues raised by two bank trade associations about competitive imbalances regarding the change in the minimum DIF reserve ratio which would exceed the top statutory reserve ratio of 1.50 percent for the NCUSIF.

Below is FDIC's discussion.

"Two trade groups also noted that the National Credit Union Share Insurance Fund (NCUSIF) reserve ratio is limited by statute to 1.5 percent and argued that a higher DIF reserve ratio could exacerbate competitive imbalances. The presence or absence of a cap on fund size is but one of several statutory differences between FDIC-insured institutions and federally insured credit unions. The FDIC has proposed lower assessment rates that would go into effect when the reserve ratio reaches 1.15 percent. The FDIC believes that these assessment rates are sufficiently moderate that any competitive effect is likely to be small. Moreover, this difference is likely to be more than offset by the lower assessment rates that the FDIC should be able to maintain during a downturn. 2010, for example, credit unions paid on average slightly less than 26 basis points of insured shares. Since almost all credit union deposits are insured, insured shares are analogous to domestic deposits as an assessment base. In comparison, the FDIC estimates that, in 2010, banks and thrifts will have paid an average assessment rate of slightly less than 18 basis points on a domestic-deposit-related assessment base. (Emphasis added) Under the assessment rates that the FDIC proposed in the October NPR, banks and thrifts would pay much lower average assessment rates during a future crisis similar in magnitude to the current one. The proposed system is less pro-cyclical than both the existing system and the NCUSIF system, which is a positive feature when considered across a complete business cycle.

The new system with a higher designated reserve ratio will result in less pro-cyclical assessments compared to the NCUSIF system. That means that FDIC-insured banks will pay slightly more in premium assessments than NCUSIF-insured credit unions during good times; however, banks will pay lower assessment rates during economic downturns than credit unions, when insured institutions can least afford to pay high deposit (share) insurance assessment rates.

In fact, even under FDIC's existing system, federally-insured credit unions in 2010 paid a higher average assessment rate than FDIC-insured banks -- slightly less than 26 basis points versus slightly less than 18 basis points.

House-Senate Conferees Extend TAG Program to CUs

In a previous post, I mentioned that NCUA had requested that credit unions should receive the same treatment as FDIC-insured banks with respect to a full guarantee of funds held in noninterest-bearing transaction accounts.

BNA is reporting that House-Senate conferees agreed to extend the FDIC’s Transaction Account Guarantee (TAG) program for two years beyond its current Dec. 31, 2010 expiration date. House conferees asked that this provision include federally-insured credit unions and the Senate agreed to the recommendation.

Unfortunately, I have not seen the legislative language.