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NCUA Chairman Todd M. Harper Statement on the Proposed Financial Innovation Rule

December 2022
NCUA Chairman Todd M. Harper Statement on the Proposed Financial Innovation Rule
Todd M. Harper

NCUA Chairman Todd M. Harper during a meeting of the NCUA Board in 2022.

As Prepared for Delivery on December 15, 2022

Thank you, Laura, Naghi, and Ian for your excellent presentation. My appreciation goes out to the entire team that worked to craft this notice of proposed rulemaking on financial innovation, loan participations, and eligible obligations, which is before the NCUA Board today.

For several years now, Board Member Hood has focused intently on how credit unions and fintech companies interact in the marketplace. During his tenure as NCUA Chairman, Board Member Hood led the creation of the NCUA’s Office of Financial Technology and Access. It is also his vision that paved the way for the rulemaking we are considering today.

Vice Chairman Hauptman has also been a strong proponent for this proposed rule and other financial innovation-related policy changes here at the NCUA. And, their views intersect with my own regulatory philosophy on advancing credit union innovation consistent with our statutory responsibilities.

The NCUA included in its 2022 Annual Performance Plan the strategic objective of evaluating and addressing barriers to adopting emerging financial technology by credit unions. As a measure of success, the Annual Performance Plan had the metric of issuing at least one regulatory action related to financial technology and guidance about distributed ledger technology, which the agency issued in May. With today’s consideration of this proposed rule, I can officially say we have met that goal.

Information technology is found in all aspects of the financial services sector, including credit unions. Even small credit unions rely on technology like websites, core processors, accounting software, and payment systems for their operations.

That technology has allowed new actors to emerge in the marketplace to compete with credit unions and banks in traditional areas like consumer lending, mortgages, payments, and business lending. Nevertheless, these actors can also offer new partnerships for loan participations and purchases, avenues to reach potential members, and new sources of liquidity.

Since the 2013 loan participation final rule went into effect, the NCUA has received several inquiries from federal credit unions, fintech companies, and other parties expressing confusion about how to interpret the rule. This confusion has led to inconsistent reporting of loan interests by federal credit unions and uncertainty about which sections of regulations apply to certain transactions. The fintech proposed rule before us today would clarify the NCUA’s current regulations to address these and other concerns. It would also provide flexibility for credit unions to take advantage of the benefits and opportunities provided by fintech firms.

Specifically, the proposal would remove current limits on purchases of eligible obligations and qualifying criteria for federal credit unions to purchase non-member loans from other credit unions. This would provide federal credit unions with expanded authority and autonomy to transact business with fintech companies and other institutions that offer services associated with the origination and sale of loans made to members of federal credit unions.

And, these changes would move our regulations into more of a principles-based approach, similar to the NCUA’s recent efforts related to derivatives. With this proposal, the prescriptive limits found in Section 701.23 of the NCUA’s regulations would be replaced with policy, due diligence, and risk management requirements that can be tailored to match the risk and planned activity.

As I have emphasized before, credit unions should recognize and harness the potential opportunities fintechs may offer them. However, we must also acknowledge the potential risks they pose to credit unions, their members, and the system and develop appropriate guardrails. This proposed rule strikes that balance. It provides flexibility, safety, and tailored relief to credit unions while fostering greater innovation.

This brings me to my only question for the panel. We are removing the prescriptive language that has been in our regulations for more than 40 years and replacing it with a more principles-based approach with new guardrails. However, we have seen several instances of credit unions in the past failing or getting into financial trouble through indirect lending and loan participations. Why is this proposed rule a sensible change at this time? What are the benefits for credit unions and the NCUA with this proposal?

Thank you, Laura for that answer.

This proposed rule will have a 60-day comment period. During that time, it’s essential that we hear from consumer advocates, credit unions, vendors, fintechs and other stakeholders in the financial services industry that may partner with credit unions in these new relationships. We need to hear from you about any potential risks of making these regulatory changes and how the NCUA and the industry should address these risks. We would also appreciate feedback on any unintended consequences of this regulatory change. Such feedback will help ensure the Board adopts a final rule that provides an appropriate structure for the future where credit unions can continue to grow and innovate safely and soundly.

In sum, I will support issuing this proposed rule. That concludes my comments. I now recognize Vice Chairman Hauptman.

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