NCUA Adopts CAMEL “S” Rating System

The National Credit Union Administration Board approved a final rule which will update the NCUA’s supervisory rating system from CAMEL to CAMELS by adding the “S” (Sensitivity to Market Risk) component to the existing CAMEL rating system and redefining the “L” (Liquidity Risk) component.

The benefits of adding the “S” component are to enhance transparency and allow the NCUA and federally insured consumer and corporate credit unions to better distinguish between liquidity risk (“L”) and sensitivity to market risk (“S”). The addition of “S” also enhances consistency between the supervision of credit unions and financial institutions supervised by the other banking agencies.

Implementation of the revised CAMELS rating system will take place on the final rule’s effective date, which is April 1, 2022.

The Washington DFI has utilized the “S” component for several years, and it was added to the Idaho Code in an update to the Idaho Credit Union Act in 2019. To our knowledge, it has had very little impact on the composite rating, but where it has had an impact, it was generally positive, providing credit unions a better measure of the two risk areas. Typically credit unions do not have an extensive set of long-term assets on their books, which create significant interest rate risk.

Sensitivity to Market Risk ratings is based on, but not limited to, the following evaluation factors:

  • Sensitivity of a credit union’s current and future earnings and economic value of capital to adverse changes in market prices and interest rates;
  • Management’s ability to identify, measure, monitor, and control exposure to market risk considering a credit union’s size, complexity, and risk profile; and
  • The nature and complexity of interest rate risk exposure.

Examiners will rate a credit union’s “S” CAMELS rating component on a scale of 1 to 5.

S RATINGDESCRIPTION
1• Risk management practices and controls for market risk are strong for the size and sophistication of the credit union, and the level of market risk it has accepted.
• There is minimal potential for market price or interest rate changes to create a material adverse effect on the credit union’s earnings performance or capital position.
• The credit union has more than sufficient earnings and capital to support the level of market risk taken by the credit union.
2• Risk management practices and controls for market risk are satisfactory for the size and sophistication of the credit union, and the level of market risk it has accepted.
• There is only moderate potential for market price or interest rate changes to create a material adverse effect on the credit union’s earnings performance or capital position.
• The credit union has sufficient earnings and capital to support the level of market risk taken by the credit union.
3• Risk management practices and controls for market risk are not fully commensurate with the size and sophistication of the credit union, or the level of market risk it has accepted.
• There is high potential for market price or interest rate changes to create a material adverse effect on the credit union’s earnings performance or capital position.
• The level of market risk taken is high in relation to the credit union’s earnings or capital.
4• Risk management practices and controls for market risk are significantly deficient given the size and sophistication of the credit union, or the level of market risk it has accepted.
• There is high potential for market price or interest rate changes to threaten the viability of the credit union.
• The level of market risk taken is excessive in relation to the credit union’s earnings or capital.
5• The level of market risk taken or exposure to market price or interest rate changes is an imminent threat to the credit union’s viability.

Liquidity ratings are based on, but not limited to, the following evaluation factors:

  • The adequacy of liquidity sources compared to present and future needs and the ability of the credit union to meet liquidity needs without adversely affecting its operations or condition;
  • The availability of assets readily convertible to cash without undue loss;
  • Access to sources of funding;
  • The level of diversification of funding sources, both on- and off-balance sheet;
  • The degree of reliance on short-term, volatile sources of funds to fund longer term assets; • The trend and stability of deposits; and
  • The capability of management to properly identify, measure, monitor, and control the credit union’s liquidity position, including the effectiveness of funds management strategies, liquidity policies, management information systems, and contingency funding plans.

Examiner will rate a credit union’s “L” CAMELS component rating on a scale of 1 to 5.

L RATINGDESCRIPTION
1• The credit union has strong liquidity levels
• The credit union has well-developed funds management policies and practices.
• The credit union has reliable access to sufficient sources of funds on favorable terms to meet present and anticipated liquidity needs.
2• The credit union has satisfactory liquidity levels.
• The credit union has adequate funds management policies and practices.
• The credit union has access to sufficient sources of funds on acceptable terms to meet present and anticipated liquidity needs.
3• The credit union has low liquidity levels.
• The credit union’s funds management policies and practices are not fully commensurate with its size and complexity, or the liquidity risks it has taken.
• The credit union may lack ready access to funds on reasonable terms.
4• The credit union has inadequate liquidity levels.
• The credit union’s funds management policies and practices are inadequate given its size and complexity, or the liquidity risks it has taken.
• The credit union is likely not able to obtain sufficient funds on reasonable terms to meet liquidity needs.
5• Liquidity levels are so deficient there is an imminent threat to the credit union’s viability.
• The credit union requires extraordinary external financial assistance to meet maturing obligations or other liquidity needs.

The NCUA will issue an updated Letter to Credit Unions that explains the criteria and standards for the “S” component and how this change will be incorporated into the examination process. Additionally, the NCUA Examiner’s Guide will integrate the final rule and the Board’s expectations.

Question of the Week

Q. Does the credit union have to provide adverse action notices to joint applicants and co-signers?

A. If your credit union denies a loan based on credit report information, the credit union must provide an adverse action notice to each “consumer” involved in the denial of the loan.  A consumer includes joint applicants, but not co-signers because “only an applicant can experience adverse action.”  Therefore, if your credit union denies a loan based on a credit report, it must send an adverse action notice to all joint applicants, but not to any co-signers.

This is the case even though the Equal Credit Opportunity Act states that adverse action notices must only be sent to the primary applicant.  Any denial based on a credit report requires compliance with the Fair Credit Reporting Act, which is the regulation stating that the notice be sent to each “consumer” involved in the loan denial.

In addition, if your denial of credit was in any way based on the credit score of the members, you must send a separate adverse action notice to each person with their credit score on it.

Related Links

FCRA § 615 (a)
FTC Staff Opinion Letter
12 CFR 1002.9(f)

Compliance Alerts

National Credit Union Administration

Internal Revenue Service’s Volunteer Income Tax Assistance Program Collaboration Opportunities: The NCUA issued letter to credit unions 21-CU-12 to encourage credit unions to participate in the IRS’ Volunteer Income Tax Assistance (VITA) program.  The VITA program offers free tax assistance in-person or through assisted, self-help options.

Subordinated Debt Final Rule Effective Jan. 1, 2022: The NCUA issued letter to credit unions 21-CU-13 to remind all federally insured credit unions that the final subordinated debt rule becomes effective on Jan. 1, 2022. The final rule amends various parts of the NCUA’s regulations to permit low-income designated credit unions, complex credit unions, and new credit unions to issue subordinated debt for purposes of regulatory capital treatment.

Consumer Financial Protection Bureau

Statement on Stablecoin Report: The CFPB issued a statement regarding the Report on Stablecoins issued by the President’s Working Group on Financial Markets, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation.

Disputes on Consumer Credit Reports: The CFPB released a report which analyzes consumer disputes that appear on consumer credit reports. The report finds that consumers in majority Black and Hispanic neighborhoods, as well as younger consumers and those with low credit scores are more likely to have disputes appear on their credit reports.

Advisory Opinion on Consumer Reporting Agencies’ Matching Practices Under the FCRA: The CFPB issued guidance on consumer reporting agencies’ obligations under the Fair Credit Reporting Act (FCRA) in matching information to consumers. The Advisory Opinion highlights that a consumer reporting agency that uses inadequate matching procedures, such as “name-only matching,” in preparing consumer reports violates the FCRA.

U.S. Department of Labor Occupational Safety and Health Administration

OSHA Issues Emergency Temporary Standard for Vaccination and Testing: OSHA announce the release of a new emergency temporary standard which requires covered employers to develop, implement and enforce a mandatory COVID-19 vaccination policy, unless the covered employer adopts a policy requiring employees to choose to either be vaccinated or undergo regular COVID-19 testing and wear a face covering at work.

Office of Foreign Assets Control

OFAC has updated the SDN list as of Oct. 29. The last update prior to this was Oct. 26.

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

Posted in Compliance, Compliance News, Compliance Question.