July 31, 2020

NCUA finalizes rule on community charter FOMs, proposes CECL phase-in plan

NCUAThe NCUA Board Thursday approved several items, including: a final rule to resolve litigation surrounding its 2016 field of membership (FOM) rule, a proposed rule to establish a three-year phase-in of the current expected credit loss (CECL) standard, a proposed rule related to asset calculation of loans made under the paycheck protection program (PPP) or other similar programs, and a request for comment on its overhead transfer rate (OTR) and operating fee methodologies.

In addition to these items, the board also received a mid-session budget briefing. Ahead of the briefing, NAFCU President and CEO Dan Berger urged the board to "ensure it is devoting enough resources toward the programs that will best assist credit unions to be successful," such as virtual exams and FOM expansions, as the industry works to cope with and recover from the coronavirus pandemic. The NCUA expects to have a small year-end surplus for the Operating Budget, despite some increases to employee pay and benefits, as travel expenses have been lower than what was budgeted.

FOM Final Rule

"NAFCU applauds NCUA Chairman Rodney Hood and Board Members Todd Harper and J. Mark McWatters for modernizing FOM rules that will allow credit unions to grow stronger and serve more Americans," said NAFCU President and CEO Dan Berger. "NAFCU has long supported modernized FOM rules, and we have actively worked to beat back bank lobbyists’ unrelenting opposition to these reforms. At a time when the coronavirus crisis is severely impacting our local communities, particularly many underserved, this rule will provide greater access to financial services for consumers across our nation."

The final rule, approved unanimously, will:

  • readopt a provision from the 2016 rule to allow applicants to designate a Combined Statistical Area (CSA) as a well-defined local community if the population is 2.5 million or less;
  • provide additional explanation to support the elimination of a requirement to serve the core area of a Core-Based Statistical Area (CBSA); and
  • add an explicit provision regarding potential discrimination in the FOM selection for a CSA and CBSA.

The changes were proposed following the D.C. Court of Appeals' decision largely in favor of the NCUA in the ABA lawsuit in August 2019, which sought additional explanation of the NCUA's decision to eliminate the urban-core requirement for local communities based on core based statistical areas. Putting an end to the litigation, the U.S. Supreme Court last month declined ABA's petition to hear the lawsuit after the appeals court declined to rehear the case en banc.

It becomes effective 30 days after publication in the Federal Register. NCUA staff added that previously-approved CSA FOMs that were held up due to the litigation will be reinstated, in addition to already reinstated previously-approved rural district FOMs.

CECL Phase-In Plan

The board proposed a rule to create a three-year phase-in of the day-one adverse impacts of CECL on federally-insured credit unions' (FICUs) net worth ratios, which is on par with a rule issued by banking regulators for community banks.

In addition, the proposed rule would also exempt FICUs with less than $10 million in assets from complying with Generally Accepted Accounting Principles (GAAP) in determining their charges for loan losses and instead permits these FICUs to use any reasonable reserve methodology to cover known and probable loan losses.

"The NCUA took a strong first step toward providing credit unions with needed relief from the FASB’s CECL standard," Berger said. "While credit unions would benefit from a 3-year phase-in for compliance with CECL and a select number would receive an exemption, NAFCU firmly believes that all credit unions should be exempt from this onerous and costly accounting standard. As our economy looks to rebound from the coronavirus crisis in the years ahead, this standard could place significant strains on credit unions’ capital levels, which would harm recovering communities' access to loan options."

Fees Paid by FCUs

As credit unions participate in lending programs to help small businesses recover from the coronavirus pandemic, the NCUA proposed a rule to exclude from total assets any loan a federal credit union (FCU) reports under the PPP or similar future programs. It would amend the period used for the calculation of an FCU’s total assets to the average total assets reported on the FCU’s previous four call reports, reducing the risk the NCUA under- or over-collects operating fees relative to the board-approved budget and providing more certainty to FCUs about the operating fee charges for the forthcoming year.

OTR and Operating Fee Methodologies

The board is seeking comments on a proposal to:

  • clarify the treatment of capital project budgets when calculating the operating fees;
  • clarify the treatment of miscellaneous revenues when calculating the operating fees; and
  • modify the approach for calculating the annual inflationary adjustments to the thresholds for the operating fee rate tiers.

NAFCU has previously questioned the agency’s principles-based OTR methodology adopted in 2017 and will continue to work with the agency to ensure a fair, common-sense OTR methodology.

The proposed rules and request for comments are each open for 60-day comment periods.