NCUA Provides Guidance on LIBOR Transition Plans

The National Credit Union Administration issued Supervisory Letter SL No. 21-01, providing guidance on the discontinuance of the London Inter-Bank Offered Rate (LIBOR). The letter aims to to assist examiners in their assessment of credit unions’ preparations in transitioning to an alternative reference rate or rates.

The NCUA encourages all federally insured credit unions to transition away from using the U.S. dollar LIBOR settings as soon as possible. New contracts entered into before and after Dec. 31 should use a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate.

Although credit unions typically have limited LIBOR exposure, the supervisory guidance points out potential LIBOR exposure areas that the examiners should review for material risk. These include:

  • Real estate loans — for non-conforming or customized ARMs that a credit union has originated and held in its portfolio, examiners should determine if an ARM has robust fallback language in the event the variable rate index is no longer available.
  • Student loans make up a significant portion of LIBOR-indexed loans owned by credit unions. If a credit union holds a significant number of LIBOR-indexed student loan accounts, examiners may consider reviewing the credit union’s transition plan, check for fallback language, and determine if the credit union has dedicated sufficient resources to modify LIBOR-indexed student loan accounts.
  • Commercial loans typically have limited LIBOR exposure, but may be part of a syndicated loan that references LIBOR as the variable rate index.
  • Auto loans typically use a fixed interest rate.
  • Credit cards typically use the Prime rate for index.
  • Investments — legacy LIBOR-indexed securities.
  • Borrowings — examiners may want to determine if the amount of LIBOR-indexed real estate loans pledged as collateral to a FHLB are material, given the state of readiness of the credit union’s transition planning.
  • Shares — examiners will want to determine if any indexes were used to reprice share accounts are LIBOR-based.
  • Derivatives — exposure for credit unions is significantly smaller than for other financial institutions.

In performing their assessment, the examiners will use the following criteria to determine a credit union’s LIBOR risk exposure:

  • Credit union is prepared to stop originating or engaging in any LIBOR-related transactions as soon as possible, but not later than Dec. 31.
  • Credit union has minimal exposure to one-week or two-month LIBOR-indexed transactions that mature after Dec. 31 (either by the total number or dollar balance) that do not have robust fallback language.
  • Credit union has minimal exposure to one-, three-, six-, and 12-month LIBOR-indexed transactions that mature after June 30, 2023 (either by the total number or dollar balance) that do not have robust fallback language.

If a further review is necessary, examiners will look at several key areas that include:

  • Transition planning
  • Financial exposure measurement and risk assessment
  • Operational preparedness and risk control
  • Contract preparedness
  • Communication
  • Oversight

Question of the Week

Q. Does a power of attorney document have to be filed with the court or recorded with the county to be effective?

A. In most cases, no. The only circumstances where a power of attorney document needs to be filed is when it will be used to perform real estate transactions, in which case it needs to be recorded with the county. Filing the document with the court also allows for the member to get certified copies should they need those to satisfy the requirements of financial institutions or creditors.

Compliance Alerts

National Credit Union Administration

Agencies Extend Comment Period on RFI on Artificial Intelligence: The five federal financial regulatory agencies announced the extension of the comment period on the request for information on financial institutions’ use of artificial intelligence (AI) until July 1.

Evaluating LIBOR Transition Plans: The NCUA released Supervisory Letter SL No. 21-01 which provides guidance on the discontinuance of LIBOR and assistance to examiners in assessing a credit union’s preparations in transitioning away from LIBOR to an alternative reference rate or rates. While the revised final date for the discontinuance of the publishing of LIBOR is now June 30, 2023, the NCUA advises credit unions to stop using LIBOR in new financial contracts as soon as possible, but no later than Dec. 31.

LIBOR Transition: The NCUA released Letter to Credit Unions 21-CU-03 to provide updated information to credit unions about the sunsetting of the LIBOR transition. The NCUA encourages credit unions to transition away from using the U.S. dollar LIBOR settings as soon as possible.

NCUA Board Approves Final Derivatives Rule: The NCUA Board approved a final rule which updates the NCUA’s derivatives rule for FCUs and makes it more principles-based. It also includes guardrails, such as derivatives training and strong internal controls.

NCUA Released a Proposed Rule and Request for Comments on the Normal Operating Level Policy: The NCUA is requesting public comments on the policy to set the NCUSIF Normal Operating Level and the methodology used to set the level.

Office of Foreign Assets Control

OFAC has updated the SDN list as of May 21. The last update prior to this was May 17.

Questions? Contact the Compliance Hotline: 1.800.546.4465; compliance@nwcua.org.

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