NCUA regulation targeted, balanced

Fazio Testifies on Efforts to Ease Regulation, Makes Case for Vendor Authority

ALEXANDRIA, VA (February 10, 2015) — The National Credit Union Administration works hard to provide credit unions with regulatory relief, but Congress needs to grant authority over third-party vendors, the agency told the Senate Banking Committee today.

Larry Fazio, NCUA’s Director of the Office of Examination and Insurance, testified at the Committee’s hearing on regulatory relief for community banks and credit unions. Fazio’s testimony is available online here.

“NCUA is always mindful of the impact of regulations on credit unions,” Fazio told the Committee. “We are proactive in our efforts to identify outdated, ineffective or excessively burdensome regulations. We continually review regulations and take appropriate steps to eliminate or ease burdens whenever possible without compromising safety and soundness.”

Fazio highlighted the agency’s ongoing Regulatory Modernization Initiative. Begun in 2011, it has resulted in 15 actions to cut red tape and provide relief to thousands of credit unions.

Specifically, NCUA has eased eight regulations, providing regulatory relief to thousands of credit unions. NCUA has also streamlined three processes, facilitating more than a thousand new low-income credit union designations, increasing blanket waivers for member business loans and establishing an expedited process for examinations at smaller credit unions. NCUA has additionally issued four legal opinions allowing more flexibility in credit union operations.

In his remarks, Fazio noted that next week the Board will consider a proposed rule to include hundreds of additional credit unions under the definition of a small entity. Increasing the threshold from $50 million to $100 million would provide special consideration for regulatory relief for an additional 745 credit unions in future rulemakings.

“Should the Board adopt a $100 million threshold, 77 percent of all credit unions would be covered in future considerations of regulatory relief,” Fazio said.

Fazio told Committee members the agency performs an analysis of its rulemakings to ensure they are reasonable and cost-effective and that regulatory decisions are made after consideration of their consequences.

“Any loss to the Share Insurance Fund is ultimately borne by surviving credit unions, which may be required to pay increased premiums,” Fazio said, citing the agency’s interest-rate risk rule, liquidity rule and proposed rule on risk-based capital as examples of scaled regulation. “As the developments of the last decade have demonstrated, regulatory inaction can result in failures that impose greater cost to credit unions and society than the cost of action.” Fazio additionally offered several ideas to ease credit union regulatory burdens through legislation, including providing NCUA with regulatory flexibility, modifying field of membership requirements, enhancing member business lending and allowing healthy and well-managed credit unions to issue supplemental capital that will count as net worth.

The most critical reform Congress could make would be to provide NCUA with examination and enforcement authority over third-party vendors, Fazio said. He urged lawmakers to give the agency parity with other federal and state financial regulators in this area. The agency’s lack of authority, he said, actually creates an additional regulatory burden for credit unions.

“NCUA’s inability to oversee third-party vendors means the agency must rely on credit unions to report certain information on the vendors with which they do business,” Fazio said. “NCUA may only examine vendors with their permission and cannot enforce any corrective actions.”

The need for third-party vendor authority is best illustrated by the growth of cybersecurity threats, Fazio said.

“This is a major concern,” Fazio said. “The complexity of online communications is growing, as is the number and sophistication of hackers, thieves and terrorists seeking to exploit vulnerabilities in the system. Credit unions are increasingly using third-party vendors to provide technological services, including security. Member data are being stored in these vendors’ servers.”

NCUA is the independent federal agency created by the U.S. Congress to regulate, charter and supervise federal credit unions. With the backing of the full faith and credit of the United States, NCUA operates and manages the National Credit Union Share Insurance Fund, insuring the deposits of more than 98 million account holders in all federal credit unions and the overwhelming majority of state-chartered credit unions. At and Pocket Cents, NCUA also educates the public on consumer protection and financial literacy issues.

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