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NCUA Board Addresses Dodd-Frank Act and More

The National Credit Union Administration (NCUA) Board met briefly on March 15 to address the agency’s plan to implement requirements under the Dodd-Frank Act and a presidential order to federal agencies regarding diversity within NCUA’s workforce, an update on the National Credit Union Share Insurance Fund and a final rule that made some very minor changes to three NCUA rules.

Diversity and Inclusion Strategic Plan

The Board approved NCUA’s Diversity and Inclusion Strategic Plan. The plan was developed in accordance with the President’s Executive Order 13583 that promotes diversity in the Federal workplace and Section 342 of the Dodd-Frank Act, which requires NCUA and other federal financial regulatory agencies to each establish an Office of Minority and Women Inclusion (OMWI). The office is responsible for developing standards for equal employment opportunity as well as racial, ethnic and gender diversity of the workforce and senior management of NCUA. While this plan focuses on the agency’s requirements for its own workforce and use of vendors, the regulators under Dodd-Frank will also be reviewing diversity policies and practices of the institutions they regulate. NCUA has been holding discussions with CUNA, Leagues, NASCUS, NAFCU, and credit unions to solicit input on how the agency should approach its efforts to review credit union diversity practices and policies. 

NCUA and the other federal financial regulators must comply with requirements of the Dodd-Frank Act, but CUNA and the Leagues have stressed that NCUA must do all it can to minimize any new reporting or compliance requirements under this authority as well as the agency’s undue interference in credit union operations. 

Quarterly Report on National Credit Union Share Insurance Fund (NCUSIF)

The latest NCUSIF report reflects the positive trends the credit union system is experiencing.  Also, in response to previous questions from CUNA and others, Chairman Matz raised a number of issues during the briefing on the NCUSIF to clarify the agency’s management of the Fund. NCUA staff reported that the NCUSIF’s equity ratio was at 1.30% as of December 31, 2011. 

NCUA also reported that as of year-end 2011 there are 409 CAMEL 4 and 5 credit unions, which represent 3.31% of insured shares, or approximately $26.3 billion.  Although the number of troubled credit unions was up from 365 as of the previous year-end, insured shares in such credit unions were down considerably from $38.5 billion, or 5.08% of insured shares, a year ago. NCUA staff also noted that there are 1,741 CAMEL 3 credit unions, which represent 15.9% of insured shares, or $126.5 billion.  Combined, insured shares in CAMEL 3, 4, and 5 credit unions represent approximately 19.2% of total insured shares, down from 23.5% at the end of 2010. There were 16 total credit union failures in 2011, down from 28 in 2010. As of year-end, the NCUSIF’s reserves stand at approximately $606.6 million, which is down from over $1.2 billion at the beginning of 2011.  The reduction was almost entirely due to a decrease in future expected failure costs rather than from actual losses due to resolutions of failed credit unions.  In other words, actual losses were substantially below what NCUA has expected a year ago. 

Chairman Matz highlighted the decrease in the NCUSIF’s reserves and questioned whether the NCUSIF had been over-reserved, prior to the decrease.  The agency’s Chief Financial Officer said NCUA is required to apply a specific reserving methodology, which reflects the agency’s best estimate at one point in time of the risk of loses to the Fund. Agency staff said they are reviewing the methodology as part of an ongoing process to minimize discrepancies between estimates and actual losses.

The Board also requested staff to clarify what the impact to the Fund and to credit unions of the reduced reserves. NCUA’s Director of Examination and Insurance Larry Fazio explained that funds were moved to an Allowance for Loan Loss Account for the NCUSIF and that $279 million from the NCUSIF was paid to the Temporary Corporate Credit Union Stabilization Fund. By law, amounts in the NCUSIF above its 1.3 normal operating level are used to help reduce the Stabilization Fund’s obligations. What this means is that as a result of a substantial reduction in expected insurance losses, the Fund has been able to reduce its reserves, contributing to a very strong bottom line for the Fund in 2011.  This is similar to the way some credit unions have been able to reduce allowance for loan and lease loss accounts in 2011, contributing to improved net income.  In fact, if there were no Temporary Corporate Credit Union Stabilization Fund, NCUSIF would have paid a dividend in 2011 of about 3.5 basis points of insured shares to get the fund down to 1.3% of insured shares.  That would have represented a dividend rate of about 3.6% on credit unions’ share insurance fund deposits.  Instead, the excess capital was transferred to the Stabilization Fund, which will lower future assessments by that fund by almost $0.3 billion.  

Staff also emphasized that in December 2010, the agency’s best estimate of future losses related to the conserved corporate credit unions was $7.8 billion. NCUA’s preliminary, unaudited estimate of losses as of December 2011 is now at $3.2 billion, reflecting receivables from the agency’s asset management estates established in conjunction with the stabilization of the corporate credit unions.  Fazio noted that the transfer of funds from the NCUSIF to the Stabilization Fund could help lower the overall Stabilization Fund assessment to credit unions.  He iterated that the assessment is based on several factors, including the cash needs of the Stabilization Fund to pay out on obligations, the total costs of the resolution of the corporates and the life remaining of the Stabilization Fund, and the ability of credit unions to absorb assessments.  NCUA staff said the audit of the Stabilization Fund is expected to be completed this summer.

The new $3.2 billion estimate of remaining losses to be covered by assessments is down from the previous year’s $7.8 billion figure because of:  $2 billion in assessments collected last year, the $0.3 billion transfer of excess capital from NCUSIF, and about a $2 billion reduction in the level of expected losses on the legacy assets.  This is fairly close to an estimate CUNA recently made of the year-end remaining loss figure. The Board noted that a NCUSIF premium was not assessed last year and that it had already determined that any NCUISF premium for 2012 will be in the range of 0-6 basis points.

Final Rule – Technical Amendments to Parts 701, 760, and 790

The Board approved a final rule to make minor, non-substantive technical changes effective immediately to Parts 701, 760, and 790 of its regulations, which are nondiscrimination requirements, flood insurance, and the description of NCUA, respectively.  The changes include revisions such as designating NCUA’s Office of Consumer Protection to receive any discrimination complaints under the Fair Housing and Equal Credit Opportunity Acts; NCUA’s Office of Examination and Insurance previously handled such complaints.  It also updates the description of NCUA’s regional offices to indicate that the regions play a supporting role on chartering and insurance issues.  The agency identified a need to make these technical changes during its annual review of one-third of NCUA’s regulations.  Given the non-substantive nature of the amendments, CUNA is not planning to produce a final rule analysis on the changes.