NAFCU’s Comments to NCUA on 2012 Regulatory Review

July 23, 2012

Michael J. McKenna
General Counsel
Office of General Counsel
National Credit Union Administration
1775 Duke Street
Alexandria, VA  22314

    RE:    2012 NCUA Regulatory Review

Dear Mr. McKenna:

On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade association that exclusively represents federal credit unions, I am writing to you regarding the National Credit Union Administration’s (NCUA) 2012 regulatory review.  NAFCU appreciates the opportunity to comment. As you will note, we are not restricting our comments to the list of regulatory items listed on the agency’s 2012 regulatory review agenda as we believe there are unlisted regulations and regulatory issues that deserve the agency’s immediate attention.

As a preliminary matter, we would like to address the NCUA listening sessions conducted in five different cities across the nation in recent months.  Many of NAFCU’s member credit unions, as well as NAFCU staff, attended one or more of the sessions and have shared positive reports with us.  NAFCU extends our appreciation for the leadership of Chairman Debbie Matz and the work done by the NCUA to afford credit unions the opportunity to engage in discussion with NCUA leadership at the listening sessions.  While the sessions have undoubtedly proved worthwhile, however, we strongly believe that the NCUA must follow through and address the numerous issues raised by the industry, many of which we address throughout this letter.  Implementing changes based on the lessons learned from the sessions is essential to realizing maximum benefit of holding the sessions.

Cost-Benefit Analysis of Regulations and Coordination with Other Agencies

NAFCU believes the current cost-benefit analyses that NCUA conducts and includes in some of its regulations when issued are generally unhelpful and are not adequately thorough.  We believe it is important that, before issuing any regulation, the agency understands both the costs of compliance and realistic benefit that the regulation may have.  

As you know, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires the Financial Stability Oversight Council (FSOC) to facilitate regulatory coordination.  The FSOC is charged with facilitating information sharing and coordination among the member agencies of domestic financial services policy development, rulemaking, examinations, reporting requirements and enforcement actions.  Through this role, the FSOC is effectively charged with ameliorating weaknesses within the regulatory structure, promoting a safer and a more stable system.  

The NCUA is a voting member of the FSOC and is represented by Chairman Matz.  NAFCU believes that membership in the FSOC affords the NCUA a tremendous opportunity to effectuate the Dodd-Frank Act’s mandate that agencies coordinate their actions.  Both as a member of the FSOC and as an independent regulator, the NCUA should take every possible action to ensure that it is coordinating with other agencies as regards rulemaking and other regulatory actions, especially before issuing new regulations or making changes to existing rules.

Relatedly, NAFCU recently sent a letter to U.S. Secretary of Treasury Geithner asking that the FSOC establish policy requiring member agencies to conduct and publish a thorough cost-benefit analysis prior to issuing regulations as well as a separate cost-benefit analysis a year after each regulation the agency prescribes and every other year thereafter.  We specified that cost-benefit analysis should be conducted every two years on each regulation that an agency has on its books, with the agency required to justify the regulations’ continued existence.  These cost analyses should be reviewed by the FSOC to assess the total impact on the financial services industry. We strongly believe that conducting such exercises would better instruct regulators of the high cost of compliance, and equip them with the information necessary to assess whether a particular regulation is effective and justifiable.

Now, more than ever, it is critical that only necessary and economically justifiable regulations are prescribed.  We urge that NCUA’s cost-benefit analysis not be merely cursory, but substantive and meaningful, and have both quantitative and qualitative components.  

NAFCU strongly urges the NCUA to take the lead on these issues.  

Examinations

NAFCU continues to hear from our members that examinations are far too onerous and costly, and that regulations continue to be inconsistently applied.  As the NCUA and other regulators pile on the regulations, it is crucial that NCUA finds methods to make examinations less burdensome.  NAFCU has assisted our members with examination process with providing them a guide:  “Managing Examinations in Challenging Times.”

In this regard, NAFCU strongly urges to provide or make available to credit unions any and every resource that is at the agency’s disposal, including the recently completed National Supervision Manual, which stated purpose is to train examiners in a manner that would lead to consistent examinations.  As NAFCU understands, this manual was finalized in June following examiners’ training that was held in Orlando, Florida in April.  While we appreciate the NCUA efforts to achieve consistency, we believe credit unions should have access to the manual so they can better understand NCUA’s examinations and expectations.

Additionally, NAFCU understands that the NCUA is in the process of revising its Examiner’s Guide to reflect the litany of new and revised regulations prescribed recently.  We strongly urge the agency to finalize the guide and publish it on the agency’s website as soon as possible.  

NAFCU would also like to take this opportunity to identify an increasingly prevalent issue related to examinations.  Specifically, we are hearing from our members that examiners are frequently issuing Document of Resolutions (DORs) in situations where an examiner’s findings are more appropriate.  NAFCU strongly believes that NCUA examiners should only use DORs in limited and prescribed circumstances.  As the NCUA knows, addressing DORs is time-consuming and costly.  Accordingly, we urge the NCUA to communicate with examiners on proper use of DORs and ensure that DORs are only issued where necessary and appropriate.

Credit Unions’ Use of Latest Technology – Video Teller Machines

Credit unions are in constant pursuit to find ways to improve services to their members.  This known trait extends to use of the latest available technologies.

In a letter to NCUA’s Chairman Debbie Matz, dated June 6, 2012, NAFCU highlighted video-teller machines and their function as a service facility, and urged the NCUA to help credit unions offer such cost-effective services to their members and to those who are today not served by credit unions.  We specifically addressed the NCUA’s regulations on what constitutes a “service facility” in the letter; however, it is important to reiterate the salient points therein.

NCUA defines a service facility as “a place where shares are accepted for members’ accounts . . . [including] a credit union owned electronic facility that meets, at a minimum, [the] requirements” of accepting loan applications, disbursing loans, or operating on a regularly scheduled weekly basis. See, 75 FR 36269.  Video teller machines clearly fall within NCUA’s definition of a service facility.

Video-teller machines function in the same manner as traditional branches because members are able to interact live and face-to-face with tellers, except through a video screen.  Virtual tellers execute identical tasks as they would in person, from authorizing transactions and reviewing check images to dispensing cash.  In addition, these machines operate on a regularly scheduled weekly basis, some at all times, beyond that of a traditional brick-and-mortar branch.  

Like other technological advances, video-teller machines offer credit unions significant cost-savings and other advantages.  For instances, they serve to reduce branch operating costs and increase sales by allowing branch employees to focus on selling loans, mortgages and other products.  These machines can also reduce a credit union’s real-estate costs because they take up far less room than a row of teller windows.  Further, they decrease the risk of exposure of tellers to criminal activity.

Lastly, NAFCU believes video-teller machines must be clearly distinguished from traditional automated-teller machines (ATM) as they fundamentally operate differently from traditional ATMs and are much more similar to a traditional teller booth.  Unlike traditional ATMs, which NCUA does not recognize as a service facility, video-teller machines offer personal interaction with tellers that clearly differentiates them from traditional ATMs.  Also, video-teller machines provide more comprehensive functions.  They solve the problem of the inadequacy of the ATMs by providing member customers with access to a full array of services while cutting costs and improving efficiency.  

NAFCU believes video-teller machines are great new categories of service facilities as technology advances. Accordingly, we would strongly urge NCUA to take into consideration the unique characteristics of video-teller machines when it approves charter expansions, and take into consideration all new technologies that fit into NCUA’s definitions of service facilities.

Regulatory Flexibility Program
    
The agency’s Regulatory Flexibility Program (Reg Flex) has undergone significant changes over the past two years.  In 2010, the NCUA issued a final rule significantly curtailing the regulatory flexibility afforded under Reg Flex, eliminating exemptions for Reg Flex credit unions from: the requirement for obtaining a personal guarantee of the borrower’s principal for member business loans (MBLs) (except loans to not-for-profit organizations); the limit to invest no more than 5 percent of the credit union’s shares and retained earnings in fixed assets; certain stress testing of assets; and the ability to delegate discretionary control of investment authority to an investment advisor registered with the Securities and Exchange Commission.  The agency then issued a final rule in May of this year, largely eliminating the program.

NAFCU appreciates NCUA’s expansion of a number of flexibilities to all credit unions.  Still, however, we remain very much opposed to the requirement that credit unions obtain a personal guarantee on member business loans (MBL) as well as the limit on investments of fixed assets to 5 percent of the credit union’s shares and retained earnings.  

With respect to the personal guarantee requirement, we believe it should be left for the credit union to determine whether or not to require such a guarantee.  The regulation has hamstrung credit unions and placed them in a competitive disadvantage to other lenders in the small business lending market and consequently decreases or eliminates the viability of the credit union choice for some businesses as a source of small business loans; thus, the personal guarantee requirement should be removed as quickly as possible.  Management and the credit union’s board of directors are in a far better position to determine policy on the evaluation of a loan.  We find the regulatory requirement to be especially obstructive as the demand for small business loans continues to increase.  

The one-size-fits-all fixed assets rule represents a type of regulation that lacks justification.  First, the 5 percent threshold is wholly arbitrary.   It is entirely conceivable that one credit union, consistent with its business plan and growth objectives, may find that by investing in particular fixed assets in excess of 5 percent of its shares and retained earnings and having such branches is in the best interest of its members.  Many such investments are made to not only increase income, but also to make the credit union’s services more readily available and accessible for members, thus increasing shares and retained earnings.  From a safety and soundness perspective, and the ultimate goal of the rule, increased shares and retained earnings will result in a lowering of the percentage of a credit union’s investments in fixed assets.  Ultimately, it is difficult, if not impossible, to justify the rule; thus, the NCUA should repeal it and allow credit unions to establish their own investment decisions.

CUSOs and Loan Participations

In late 2011, NCUA proposed two controversial rules: one that would expand the agency’s oversight of credit union service organizations (CUSOs) and another that would severely limit credit unions’ ability to engage in loan participations.  NAFCU strongly opposed both rules.

On June 28, 2012, NCUA indicated that it does not plan to consider a final rule on the proposals for “several months,” implying that it is reconsidering part or all of the proposals’ provisions.  NAFCU appreciates this action; however, we believe that the NCUA should go further and fully withdraw both proposals.  The CUSO proposal, as we have consistently maintained, is far too costly, unnecessary and on questionable legal grounds.  The loan participations proposal would greatly limit a credit union’s options with respect to its lending and investment portfolio, and would have a catastrophic effect on many credit unions that have established successful programs.  Thus, it is imperative that the agency not only delay consideration of the proposals but withdraw both in their entirety.  

NCUA’s Rules on Advertising and Notice of Insured Status

In May 2011, the NCUA issued regulations on advertising and notice of insured status.  The regulations, although well-intended, have proved problematic for many credit unions and should be revisited.

First and foremost, however, NAFCU would like to express its strong support for federal insurance for credit unions.  We believe that federal insurance is not only pivotal for the viability of the industry, but is, in fact, a cornerstone.  Thus, we support efforts to strengthen and stand ready to work with the NCUA on this issue.

The NCUA’s regulations advertising and notice of insured status require that credit unions include the agency’s official advertising statement in all advertisements.  This requirement does not apply to radio and television advertisements that do not exceed 15 seconds; however, prior to the 2011 regulations, the exemption was for radio and television advertisements that do not exceed 30 seconds.  Second, the regulations require that in print advertisements, the official advertisement may be no smaller than the smallest font size used in other portions of the materials intended to convey information to the consumer.  Third, the rule requiring notice of insured status requires that “Each insured credit union must also display the official sign on its Internet page, if any, where it accepts deposits or opens accounts, but it may vary the font sizes from that depicted in paragraph (b) of this section to ensure its legibility.” See, 12 CFR 704.4.

NAFCU generally believes that credit unions’ federal insurance status should be transmitted and conveyed as much as possible; however, regulations should be crafted in a manner that balances this important priority with challenges and limitations associated with credit unions’ use of media, and latest technologies and platforms.  For example, credit unions are finding that the exemption for 15 seconds advertisements is not useful for effective advertising.  As NCUA may know, the Truth in Lending Act, Truth in Savings Act, the Federal Reserve Board’s Regulation DD and certain trigger terms require disclosures in advertising.  In some cases, these disclosures can take up to 10 seconds.  Accordingly, if the substance of an advertisement is more than 5 additional seconds, then the credit union must allocate additional time to issue NCUA’s official advertisement.  To make the exemption worthy, we strongly urge the agency to at least revert it back to 30 seconds.

In regards to the rule relative to print advertisements, we believe the rule makes the official statement far too prominent, resulting in the reduction of the effectiveness of the substance and purpose of the advertisement.  We believe the NCUA logo and statement is a visual representation that only needs to be present to convey its value and importance. Accordingly, we urge the NCUA to remove the size requirement.

With respect to the rule requiring notice of insured status on a credit union’s internet page, we ask that the NCUA clarify the phrase “where it accepts deposits or opens accounts.”  NAFCU members have reported that this requirement is being applied inconsistently, and given innovations such as mobile banking, NCUA should be clear as to its meaning.  

FCU Chartering, Field of Membership Modification and Conversions

NAFCU believes that the federal charter is the best option for consumers.  In the past, the NCUA Board has recognized that clarification of NCUA’s chartering policy will provide a significant benefit to consumers through increased access to federal credit unions.  NAFCU looks forward to continuing to work with the agency to ensure that federal credit unions remain competitive in an increasingly complex financial marketplace.

Since passage of the Credit Union Membership Access Act (CUMAA) in 1998 and the subsequent implementation of Interpretive Ruling and Policy Statement (IRPS) 99-1 (as amended), NAFCU has had continuing communications with NCUA regarding suggested improvements to its chartering and field of membership policy.  Since CUMAA’s passage, NCUA and NAFCU have been faced with litigation over NCUA’s regulatory implementation of the field of membership provisions of CUMAA.  NAFCU has always maintained, however, that the agency could, and should, further expand and clarify the community chartering process within the confines of CUMAA and the Federal Credit Union Act (FCU Act).  We would like to take this opportunity to urge the NCUA to take specific actions within its power that would help credit unions make their products and services more readily available and offer more consumers the credit union option.

Well-Defined Local Community, Neighborhood or Rural District

Under the FCU Act, the field of membership of a community-chartered FCU must be a “well-defined local community, neighborhood or rural district.” See, 12 U.S.C. § 1759(g).  Although the term “local” was added as a result of CUMAA, Congress provided NCUA with no input on the definition of a local community, neighborhood or rural district, and no legislative history exists with respect to Congress’ intent behind the term.  Other statutory and regulatory interpretations of the term “local community” exist however, and define the term broadly.  See attached chart, showing various interpretations of the term.

NCUA’s chartering and field of membership policy, contained in the agency’s Chartering Manual, provides three definitions of what constitutes a “local community.”  First, any city, county or smaller political jurisdiction, regardless of population size, meets the definition of a local community.  Second, in an area consisting of multiple jurisdictions, the area must be a core-based statistical area (CBSA) or a Metropolitan Division, or part thereof, and the CBSA or Metropolitan Division must have a population of 2.5 million or less. Third, the manual provides two options for meeting the well-defined local community standard where the area is a rural district, but imposes a maximum population of 200,000 in such cases.

NAFCU would like to address the overly restrictive definition of “rural district,” and request that the NCUA revise its regulation consistent with following comments.

Under NCUA’s regulations, a “rural district” is defined as: (1) a district that has well-defined, contiguous geographic boundaries; (2) more than 50% of the district’s population resides in census blocks or other geographic areas that are designed as rural by the United States Census Bureau; and (3) does not exceed certain other population thresholds.  The district’s population cannot exceed either: (a) 200,000 people, or (b) if the district is well-defined with contiguous geographic boundaries, it does not have a population density in excess of 100 people per square mile, and the total population of the district does not exceed 200,000.

As we have expressed many times to the NCUA, it is important that the definition is not overly restrictive and consequently deprives many Americans of the opportunity to receive high quality financial services from a credit union that would like to offer its services to them.  Our vast and diverse country is populated dramatically differently from one part to another.  Each part is so unique that imposing a population standard that applies across the board simply overlooks the diversity among rural areas.  Therefore, NAFCU appreciates that defining “rural district” would be a challenging endeavor.  

NAFCU recommends that the NCUA incorporate two specific changes.  First, the definition of “rural district” should be expanded so that meeting one of the following two definitions would suffice.

The first definition would combine two different designations, one used by the U.S. Census Bureau and one used by the U.S. Department of Agriculture (USDA).  Under this two-pronged definition, all census tracts designated by the U.S. Census Bureau as nonmetropolitan, i.e., outside metropolitan statistical areas (MSAs) designated by the Office of Management and Budget, would be considered rural areas, as would all census tracts outside of urbanized areas and urban clusters, as designated by USDA’s Rural-Urban Commuting Area (RUCA) code.

The second definition is based on classifications used by the U.S. Census Bureau for the 2000 census and distinguishes between urban and rural areas. Urban areas are classified as all territory, population and housing units located within urbanized areas and urban clusters.  In general, urbanized areas must have a core with a population density of 1,000 persons per square mile and may contain adjoining territory with at least 500 persons per square mile. Urban clusters have at least 2,500 but less than 50,000 persons. Rural areas are classified as all territory located outside of urbanized areas and urban clusters.

Additionally, the agency should increase the current population thresholds of 200,000 and 100 person per square mile limits as both are far too low.  We note that previously, the NCUA’s population limit for a rural district was 500,000; thus, with the 2010 changes, effectively, the agency decided that a “rural district” is actually 60% smaller in population than it previously thought.  This fact, in and of itself, is troubling.

NAFCU believes that both the 100 people per square mile and the 200,000 people limit are arbitrary and do not pass even a cursory review of our nation’s makeup.  For example, there are many rural areas that would, by any reasonable measure, be regarded as rural but would fail because of the NCUA’s limits.

Charter Conversions

NAFCU continues to hear from our members that NCUA’s regulations on charter conversions for credit unions that seek to convert from one type of federal charter to another are unreasonable.  We ask that NCUA reviews its rules on conversions and initiate a rulemaking for changes, with particular focus on conversions to a community charter.

As NCUA is well aware, one of the most controversial and in NAFCU’s opinion, one of the most egregious rules on chartering prevents a single- or multi-associational chartered FCU from continuing to serve its existing field of membership when it converts to a community charter, unless the field of membership is entirely within the new community.  The effect of this limitation has been that FCUs are dissuaded from offering their services to more people, a result that we do not believe is desirable.  Accordingly, we urge the NCUA to remove this restriction.

Part 703 – Investment Powers

Section 1757 of the Federal Credit Union Act (FCU Act) grants a FCU a range of specific powers that are aimed at enabling it to provide low-cost financial services to its members.  In addition, a FCU is authorized to exercise “such incidental powers as shall be necessary or requisite to enable it to carry on effectively the businesses for which it is incorporated.” See, 12 USC 1757(17).  (Emphasis added.)  However, the Act also grants the agency discretionary authority to limit FCUs’ powers.

Part 703 implements this section of the FCU Act by, among other things, providing limits to FCUs’ investment powers, including listing prohibited investments and investment activities.  One of these prohibited activities is the purchase of mortgage servicing rights (MSR) as an investment.  See, 12 CFR 703.16(2).  

Over the past two years, the NCUA signaled that it is reviewing credit union investment powers.  For example, it issued for comment two Advance Notice of Proposed Rulemakings (ANPRs) on FCUs’ authority to engage in derivatives.  NAFCU appreciates this initiative; however, we believe the NCUA should also revise other sections of Part 703 to enable credit unions more options to serve their members.

With that in mind, we believe the NCUA should remove from the list of prohibited activities the ability to purchase MSRs.  In particular, at the very least, a federally-insured credit union (FICU) should not be prohibited from purchasing MSRs from other credit unions.  

The credit union industry, like each credit union, is a cooperative system.  Many credit unions, especially small credit unions, neither have the capacity nor the resources to perform certain functions.  As a result, they have to rely on third parties to perform such functions.  We believe it is both in the best interest of each such credit union, and the industry as a whole, if as many of these functions as possible are performed by other credit unions.  This approach is not only consistent with the credit union cooperative model, but will also better address safety and soundness concerns of individual credit unions as well as the National Credit Union Share Insurance Fund (NCUSIF).  Accordingly, the agency should remove the prohibition against purchasing MSRs from other credit unions.

Prompt Corrective Action

For the past fourteen years, credit unions have been regulated under a regulatory capital regime that includes a Prompt Corrective Action (PCA) system.  It is NAFCU’s contention that many lessons have been learnt over the years and it is time that the NCUA and the industry work together to address the many incongruences between the purpose of PCA and the effect of related specific legislative and regulatory impediments.

To address these issues, NAFCU understands that NCUA has an internal working group looking at PCA reform.  NAFCU supports this action, but calls for an establishment of a committee composed of industry and NCUA representatives, including NAFCU and its members.  Such committee should be charged with identifying problems associated with the current PCA regime and with offering specific solutions.  We ask that the NCUA takes a lead in assembling the committee as soon as possible.

Updating NCUA Regulations

NAFCU would like to take this opportunity to urge the NCUA to update its regulations by making technical changes to various incorrect references.  For example, NCUA’s regulations are replete with incorrect references to Federal Reserve Board regulations that have been transferred to the Bureau of Consumer Financial Protection (CFPB).  The NCUA should make these technical changes as quickly as possible, as incorrect references unnecessarily create confusion and difficulties with compliance.

To help facilitate with this endeavor, NAFCU has attached Appendix A to this comment letter, a list of incorrect references in NCUA’s regulations.  

NAFCU appreciates the opportunity to provide comments on NCUA’s 2012 Regulatory Review.  Should you have any questions or would like to discuss these issues further, please contact me by telephone at (703) 842-2234 or by email at chunt@nafcu.org, or Tessema Tefferi, NAFCU’s Regulatory Affairs Counsel, by telephone at (703) 842-2268 or by email at ttefferi@nafcu.org.

Sincerely,
 

Carrie Hunt
General Counsel and Vice President of Regulatory Affairs

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