NCUA Proposes Complex Credit Union Leverage Ratio

The National Credit Union Administration recently approved a proposed rule, which would modify the NCUA’s capital adequacy regulation and provide relief for some federally insured credit unions classified as “complex” — those with total assets greater than $500 million.

Under the proposed rule, a complex credit union that maintains a minimum net worth ratio, as well as other qualifying criteria, will be eligible to opt into the complex credit union leverage ratio (CCULR) framework. The minimum net worth ratio would initially be established at 9% on Jan. 1, 2022, and be gradually increased to 10% by Jan. 1, 2024. The other qualifying criteria are:

  • Total off-balance sheet exposure of 25% or less of total assets;
  • The sum of total trading assets and total liabilities of 5% or less of total assets; and
  • The sum of total goodwill that meets the definition of excluded goodwill, and the total of other intangible assets, including intangible assets that meet the definition of excluded other intangible assets, of 2% or less of total assets.

A complex credit union that opts into the CCULR framework would not be required to calculate a risk-based capital ratio under the risk-based capital final rule. A qualifying complex credit union that opts into the CCULR framework and that maintains the minimum net worth ratio would be considered well-capitalized.

The proposed rule would also make additional amendments to the risk-based capital final rule, including addressing asset securitizations issued by credit unions, clarifying the treatment of off-balance sheet exposures, deducting certain mortgage servicing assets from a complex credit union’s risk-based capital numerator, updating several derivative-related definitions, and clarifying the definition of a consumer loan.

Question of the Week

Q. Our credit union would like to contract with a third party for services and would like to know what we need to do.

A. NCUA’s Letter to Federal Credit Unions (07-CU-13) lays out a number of factors that credit unions should consider before entering into a third-party servicing relationship. According to NCUA, credit unions should consider the following:

  • Will the third-party relationship complement the credit union’s overall mission and philosophy?
  • How critical is the activity being outsourced?
  • How will the third-party relationship impact (if at all) the credit union’s strategic plans (long-term goals, objectives, and resource allocation)?
  • How do the risks/benefits of outsourcing the particular function compare with keeping the function in-house?
  • How the third-party relationship will impact (if at all) seven risk areas (credit risk, interest rate risk, liquidity risk, transaction risk, compliance risk, strategic risk, and reputation risk)?
  • Does credit union staff have the expertise to manage and monitor a third-party relationship?
  • Will the third-party relationship create additional insurance responsibilities for the credit union?
  • How will the relationship impact the credit union’s membership (positive and negative)?
  • Does the credit union have an effective exit strategy?

The guidance highlights the need for credit unions to perform extensive due diligence and review the risks/benefits of outsourcing member services prior to engaging in a third-party vendor relationship.

Additionally, the NCUA published Letter 08-CU-09 which provides the third-party relationship questionnaire that examiners will use, as well as Letter 10-CU-26 which discusses the evaluation of payment system service providers. NCUA Letter 08-CU-19 addresses third-party mortgage relationships.

Related Links

NCUA Letter 07-CU-13
NCUA Supervisory Letter 07-01
NCUA Letter 10-CU-26
NCUA Letter 08-CU-09
NCUA Letter 08-CU-19

National Credit Union Administration

Implementation of Modernized Systems: The NCUA issued Letter to Credit Unions 21-CU-08 which provides insight into the NCUA’s recent technology modernization efforts and outlines the implementation of key software tools.

FFIEC Issues Guidance on Authentication and Access to Financial Institution Services and Systems: The NCUA issued a press release that details the FFIEC’s guidance for financial institutions that provides examples of effective authentication and access risk management principles for customers, employees, and third parties accessing digital banking services and information systems.

Consumer Financial Protection Bureau

Credit Card Limits Are Rising For Most Groups After Stagnating During the Pandemic: The CFPB released a report on the trend for credit tightening on existing credit card accounts. Due to the large number of unemployment and income shocks that occurred as a result of the pandemic, financial institutions may have limited access to credit during the pandemic.

CFPB Report: Mortgage Servicers’ Pandemic Response Varies Significantly: The CFPB published a report which details the response of 16 large mortgage servicers to the COVID-19 pandemic. The report’s data metrics highlight the industry’s widely varied response to the pandemic.

Office of Foreign Assets Control

OFAC has updated the SDN list as of July 22. The last update prior to this was July 2.

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