Board Approves Final Subordinated Debt Rule

Board Action Bulletin

Proposes Rules on Shared Facility Requirements, Mortgage Servicing Rights, Overdraft Policy

ALEXANDRIA, Va. (Dec. 17, 2020) – Through a live audio webcast, the National Credit Union Administration Board today held the first of two consecutive open meetings in December. At today’s meeting, the Board approved these five items:

• A proposed rule revising the definition of a service facility for multiple common bond federal credit unions;
• A temporary final rule that extends regulatory relief measures in response to COVID-19.
• A proposed rule that permits federal credit unions to purchase mortgage-servicing rights from other federal credit unions under certain conditions;
• A proposed rule on overdraft policy; and
• A final rule on subordinated debt.

The Board also received a staff briefing on the National Credit Union Share Insurance Fund’s 2021 normal operating level.

Field of Membership Shared Facility Requirements Proposed

The definition of a service facility for multiple common-bond federal credit unions outlined in the NCUA’s Chartering and Field of Membership Manual would be revised by a proposed rule (Part 701, Appendix B) approved 2-1 by the Board.

“Today’s action is good public policy and will allow individuals greater access to affordable products and services—especially in underserved and low-income areas,” Chairman Hood said during consideration of the rule. “Removing barriers so that federal credit unions can serve additional members has been a key part of my focus on financial inclusion. And these are changes that really should have happened a long time ago.”

The Board is proposing to include any shared branch, shared ATM, or shared electronic facility in the definition of “service facility” for a multiple common-bond federal credit union that participates in a shared branching network. The federal credit union does not need to be an owner of the shared branch network for the shared branch or shared ATM to be a service facility. These changes would apply to the definition of a service facility for additions of select groups to the fields of membership of multiple common-bond federal credit unions and for expansions into underserved areas.

The Board is also seeking comments about whether it should further amend the definition of “service facility” to include a federal credit union’s interactive website or mobile banking application.

Comments on the proposed rule must be received within 30 days of publication in the Federal Register.

Regulatory Relief in Response to COVID-19 Extended

The Board unanimously approved an extension of the effective date of its temporary final rule, which modified certain regulatory requirements to help ensure that federally insured credit unions remain operational and can properly conduct appropriate liquidity management to address economic conditions caused by the COVID-19 pandemic.

Specifically, the temporary final rule issued by the Board in April 2020:

• Raised the maximum aggregate amount of loan participations that a federally insured credit union may purchase from a single originating lender to the greater of $5,000,000 or 200 percent of the credit union’s net worth;
• Suspended limitations on the eligible obligations that a federal credit union may purchase and hold; and
• Suspended the required timeframes for the occupancy or disposition of properties not being used for federal credit union business or that have been abandoned.

Each of these temporary modifications would have expired on December 31, 2020. Due to the continued effects of COVID-19 on credit unions and their members, the Board decided to extend these measures until December 31, 2021.

Proposed Rule to Permit Purchase of Mortgage Servicing Rights

The Board approved 2-1 a proposed rule to amend its investment regulation to permit federal credit unions to purchase mortgage servicing rights from other federally insured credit unions under certain conditions.

“The time has come for the NCUA to permit federal credit unions to purchase mortgage servicing rights from other federally insured credit unions,” Hood said. “The ability to do this will provide flexibility for federal credit unions to manage their mortgage servicing lines of business, and create liquidity in the credit union system while providing a more diverse business and investment opportunity for purchasers of mortgage servicing rights.”

Under the proposed rule, eligible federal credit unions may purchase the mortgage servicing rights of loans that the federal credit union is otherwise empowered to grant, provided these investments are consistent with safety and soundness and made in accordance with the federal credit union’s policies and procedures that address the risk of these investments and servicing practices.

Comments on the proposed rule must be received within 30 days of publication in the Federal Register.

Proposed Overdraft Rule to Provide Flexibility

The Board approved 2-1 a proposed rule that would require federal credit unions to modify one of the requirements that a federal credit union must adopt as a part of their written overdraft policy.

Said Chairman Hood, “If a participating member’s account is overdrawn, the credit union will, for a fee, cover the transaction. In some cases, overdraft protection can serve as a form of short-term credit, offering credit union members greater peace of mind and flexibility in managing their finances. During times of economic stress, in particular, access to short-term credit can be especially helpful. For a working parent on a reduced income, or a small business owner trying to keep her head above water until economic recovery begins, a quick source of affordable credit could help bridge the gap.”

Specifically, the proposed rule would modify the requirement that a federal credit union’s written overdraft policy establish a time limit, not to exceed 45 calendar days, for a member to either deposit funds or obtain an approved loan from the federal credit unions to cover each overdraft.

The proposed rule would remove the 45-day limit and replace it with a requirement that the written policy must establish a specific time limit that is both reasonable and applicable to all members, for a member either to deposit funds or obtain an approved loan from the federal credit unions to cover each overdraft.

Comments on the proposed rule must be received within 30 days of publication in the Federal Register.

Final Rule on Subordinated Debt Approved

The Board unanimously approved a final rule that 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.

“Federal credit unions borrowing in the form of subordinated debt is squarely within the statutory authority provided under law,” Hood said. “I support giving complex credit unions the authority to prudently use subordinated debt as an additional tool to comply with risk-based capital requirements, and newly chartered credit unions the ability to use this tool to get up and running. I am pleased with the balance we’ve struck with this final rule.”

The Board is finalizing the rule largely as proposed in January 2020, except for a few changes to various sections based on the comments received.

These changes include:

• Amending the definition of accredited investor;
• Providing a longer timeframe in which a credit union may issue subordinated debt after approval;
• Reducing the required number of years of pro forma financial statements an issuing credit union must provide with its application;
• Clarifying the prohibition on subordinated debt issuances outside of the United States; and
• Clarifying that the NCUA Board will publish a fee schedule only if it makes a determination to charge a fee.

This rule is effective January 1, 2022.

Normal Operating Level to Remain at 1.38 Percent

Staff from the NCUA’s Offices of Examination and Insurance and Chief Economist briefed the Board on the National Credit Union Share Insurance Fund’s normal operating level for 2021 and recommended the level remain unchanged at 1.38 percent.

The recommendation was based on a calculation of the normal operating level using 2020 data and the Board-approved methodology. In determining the recommendation, the following issues were considered:

• Potential impact of a moderate recession on the Share Insurance Fund;
• Potential decline of value in claims on corporate estates; and
• Projected decline in the equity ratio.

The agency reviews the normal operating level annually.

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