July 24, 2020

NCUA set to address FOM changes, CECL implementation

NCUAThe NCUA Board next week is expected to finalize a rule to make its 2016 field of membership (FOM) rule consistent with last year's decision from the U.S. Court of Appeals for the D.C. Circuit in the lawsuit brought by the American Bankers Association (ABA). In addition, the board will propose a rule to transition credit unions to the current expected credit loss (CECL) standard.

FOM Final Rule

The D.C. Court of Appeals ruled largely in favor of the NCUA in the ABA lawsuit in August 2019 and 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 earlier this month declined ABA's petition to hear the lawsuit after the appeals court declined to rehear the case en banc.

To address the appeals court's concerns, the NCUA in October proposed a rule that would:

  • re-adopt a provision to allow an applicant to designate a combined statistical area (CSA), or an individual, contiguous portion CSA, as a well-defined local community, provided that the chosen area has a population of 2.5 million or less;
  • provide further explanation and support for eliminating the urban-core requirement for local communities based on CBSAs, as provided for in the 2016 FOM rule; and
  • provide express authority for the NCUA to reject a credit union application for CSAs and CBSAs if the agency determines that the FOM selection reflects discrimination (the ABA had argued that the 2016 rule would allow credit unions to engage in redlining; this addresses that concern).

NAFCU will update credit unions after the meeting on the final rule's provisions.

Following the Supreme Court announcement and a request from NAFCU, the NCUA began reinstating FOMs that were removed due to litigation and resumed processing the rural district FOM applications for those credit unions that had them held during the litigation period. It also began accepting new applications for these FOMs.

CECL Transition

At NAFCU's Congressional Caucus last year, NCUA Board Chairman Rodney Hood announced the agency has the authority to phase in the Financial Accounting Standards Board's CECL standard, and NCUA Board Member J. Mark McWatters further clarified that authority in a following op-ed. More recently, Hood in April backed NAFCU's call for an exemption for credit unions under the standard, arguing that its compliance costs outweigh its benefits.

The proposed rule expected next week will outline the NCUA's plan to adopt a phase-in of CECL's negative impact on credit union net worth ratios. The standard isn't effective for credit unions until 2023

NAFCU maintains that credit unions should not be subject to CECL – NAFCU President and CEO Dan Berger sent a letter to FASB's new chairman yesterday outlining credit unions' concerns – and will continue to work with FASB and the NCUA to obtain relief for the industry.

Amid the coronavirus pandemic, NAFCU, NCUA, and lawmakers have voiced concerns about the standard hindering financial institutions' ability to lend effectively during the recovery. While the CARES Act provided temporary relief under CECL through the end of the year, NAFCU continues to advocate for extended relief.

The association has numerous resources available to credit unions as they prepare to implement the standard.

Other items on next week's agenda include a proposed rule related to the operating fees federal credit unions pay to the NCUA each calendar year, a request for comment on overhead transfer rate (OTR) and operating fee methodologies, and a 2020 mid-session budget briefing.

The board meeting is slated to begin at 10 a.m. Eastern and will be livestreamed on NCUA's website.