NCUA Outlines Plans for Adding “S” to Credit Union CAMEL Ratings

June 2016
NCUA Outlines Plans for Adding “S” to Credit Union CAMEL Ratings

Board Action Bulletin

Board Proposes Streamlined CDRLF Rule, Adjusts Civil Monetary Penalties

ALEXANDRIA, Va. (June 16, 2016) – The National Credit Union Administration Board held its sixth open meeting of 2016 at the agency’s headquarters here today and received a briefing about plans for adding a “sensitivity to market risk” element to assess interest rate risk to the current CAMEL rating system.

The Board also unanimously approved two items:

  • A proposed rule that makes technical amendments to improve the transparency, organization, and ease of credit union use of the Community Development Revolving Loan Fund; and
  • An interim final rule adjusting civil monetary penalties for inflation, as required by federal law.

Adopting an “S” to Current CAMEL Rating System Would Be Beneficial

NCUA’s Office of Examination and Insurance recommended the NCUA Board consider releasing a proposal in the coming months to incorporate an “S” for “sensitivity to market risk” into the current CAMEL rating system for credit unions.

The CAMEL rating system, which evaluates a credit union’s overall condition, measures five critical elements: capital adequacy, asset quality, management, earnings and liquidity. Overall CAMEL scores range from 1 (sound in every respect) to 5 (extremely unsafe and unsound).

Presently, NCUA assesses interest rate risk as part of the liquidity rating. Federal banking supervisors, however, already include an “S” in the rating system, as do 16 state credit union regulators. Five additional state credit union regulators are working to adopt this approach. NCUA considered the addition of the “S” element when bank supervisors first adopted it, but opted not to do so based on the relative lack of complexity in credit unions’ balance sheets at that time. However, Examination and Insurance staff believe the changing size and complexity of the credit union system warrants its adoption now.

“This idea has been discussed for several years, and the time is ripe to make a formal proposal,” NCUA Board Chairman Rick Metsger said. “If we do this, it will require NCUA to reprogram several internal systems and make revisions to supervision programs and existing documents, but the benefits appear to outweigh those costs.”

Examination and Insurance staff told the Board that the benefits of adding the risk sensitivity element include greater clarity, accuracy and transparency in how interest rate risk is assessed. Staff recommended the agency draft and issue a proposal for public notice and comment. The comment-and-review process, subsequent program changes and implementation would take several years.

The agency’s Office of the Inspector General last year also recommended adoption of the sensitivity element, and the agency’s Executive Director agreed, making a commitment to present a proposed regulation change to the Board by the end of the third quarter of 2016. Final implementation could be made by 2018.

Proposed Rule Would Add Clarity, Flexibility to CDRLF Application Process

Eligible credit unions applying for funding from the Community Development Revolving Loan Fund would find that process more flexible and easier to understand under a proposed rule (Part 705) approved by the Board.

The proposed rule does not change the general guidelines for Community Development Revolving Loan Fund loan and grant programs.

Among the proposed changes is the removal of the $300,000 aggregate limit for loans to individual credit unions, giving NCUA greater flexibility in designing loan programs. The Board proposed to remove the dollar amount, as it is unnecessary and inaccurate. NCUA may grant loans in any amount it sees fit. That amount may rise in connection with need and economic conditions. Rather than keeping an outdated reference to a specific dollar amount, the Board proposed to amend the rule by providing that any CDRLF loan limits will be published in a Notice of Funding Opportunity.

The proposed changes also include lifting the current requirement that federally insured, state-chartered credit unions obtain the state credit union regulator’s approval before submitting a loan application, making the application process less burdensome.

Comments on the proposed rule, available online here, must be received within 60 days of publication in the Federal Register.

Civil Monetary Penalties Adjusted for Inflation

The NCUA Board approved an interim final rule (Part 747) to amend its regulations and adjust the maximum amount of civil monetary penalties under its jurisdiction to account for inflation, as required by federal law.

“In raising the maximum penalty levels, NCUA is doing what Congress required,” Metsger said. “NCUA does not assess such penalties very often, and we haven’t assessed them at or near the maximum allowed by federal law. It’s a last resort. We do, however, use civil monetary penalties to encourage the timely filing of Call Reports. Over a four-year period, the number of late reports has fallen from 1,744 per quarter to fewer than 30 in the most recent quarter. So, these penalties have had the intended effect of significantly decreasing the number of late filers.”

The civil monetary penalties NCUA assesses for late filers are modest, with the total penalties for the fourth quarter of 2015 totaling only $13,546. The median penalty for that quarter was $356.

NCUA last adjusted civil monetary penalties in September 2015. Previously, these adjustments for inflation were required every four years. In November 2015, Congress changed federal law to require annual adjustments and provide for a one-time “catch-up” adjustment for 2016. Beginning in 2017, agencies must publish their inflation adjustment rules in the Federal Register by Jan. 15 of each year.

The Federal Credit Union Act requires NCUA to send any funds received through civil monetary penalties to the U.S. Treasury.

The interim final rule, available online here, will become effective 30 days after publication in the Federal Register. Comments on the rule must be received within 30 days after publication in the Federal Register.

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