NOL, Budget, Leverage Ratio, Mortgage Servicing, & Sub. Debt

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During this week’s National Credit Union Administration (NCUA) board meeting, the board approved setting the National Credit Union Share Insurance Fund’s (NCUSIF) normal operating level (NOL) at 1.33 percent in 2022, adopted its 2022 - 2023 budget, and approved three final rules. Here the key takeaways:

Normal Operating Level (NOL): NCUA board approved the NOL to 1.33 percent, down from the previous level of 1.38 percent, which was set in 2020 and remained unchanged in 2021. The board will continue to use a decline in the share insurance fund’s equity in a moderate recession to estimate the additional equity needed to prevent the equity ratio from falling below 1.2 percent, and any change to the NOL of more than 1 basis point will require public notice and opportunity for comment.

NCUA’s 2022 - 2023 Budget: The board approved the agency’s 2022-2023 budget. The total budget (Operating Budget, Capital Budget, and Share Insurance Fund Administrative Budget) is $339.5 million and 1,196 full-time employees (FTE). This reflects a carryover of $23 million of unspent 2021 budget funds for the Operating Budget. The 2023 budgets would increase over 2022 by $41.8 million (resulting in part to the lack of the $23 million carryover for 2023). The staff draft Operating Budget was proposed at $326 million with 1,242 FTEs. The approved Operating Budget was reduced to $320 million and 1,196 FTEs.

Final Rules: The NCUA board approved the following three final rules:

  • Complex Credit Union Leverage Ratio -- CCULR (Parts 702 and 703): Under this final rule, a complex credit union that maintains a minimum net worth ratio, and that meets other qualifying criteria, is eligible to opt into the complex credit union leverage ratio (CCULR) framework if they have a minimum net worth ratio of 9 percent. A complex credit union that opts into the CCULR framework is not required to calculate a risk-based capital ratio under the October 2015 risk-based capital final rule. The final rule also makes several amendments to update the NCUA’s October 2015 risk-based capital final rule, including addressing asset securitizations issued by credit unions, clarifying the treatment of off-balance sheet exposures, deducting certain mortgage servicing assets from a complex credit union’s risk-based capital numerator, revising the treatment of goodwill, and amending other asset risk weights. The CCULR final rule becomes effective Jan. 1, 2022, consistent with the effective date of the risk-based capital final rule.
  • Mortgage Servicing Assets (Part 703): Under the final rule, federal credit unions (FCUs) with a CAMEL or CAMELS composite rating of 1 or 2, including a management component rating of 1 or 2, may purchase the mortgage servicing rights of loans from other federally insured credit unions (FICUs) provided that: 1) the underlying mortgage loans of the assets are loans the FCU is otherwise empowered to grant; 2) the purchase will be made in accordance with the FCU’s written policies that address the risk of these investments and servicing practices; and 3) the FCU’s board of directors or investment committee approves the purchase in advance.  In addition, the final rule relocates the current authority for an FCU to provide mortgage servicing to its members engaged in the mortgage lending business from the investment regulation to the incidental powers rule. The final rule becomes effective April 1, 2022.
  • Subordinated Debt (Part 702 and 741): The final rule amends the subordinate debt rule which the board finalized in December 2020 with an effective date of Jan. 1, 2022.  Specifically, this final rule amends the definition of “Grandfathered Secondary Capital” to include any secondary capital issued to the United States Government or one of its subdivisions (U.S. Government), under a secondary capital application approved before Jan. 1, 2022, irrespective of the date of issuance. The amendment will benefit eligible low-income credit unions (LICUs) that are either participating in the U.S. Treasury Department's (Treasury) Emergency Capital Investment Program (ECIP) or other programs administered by the U.S. Government that can be used to fund secondary capital, if they do not receive the funds for such programs by Dec. 31, 2021. The final rule also provides that the expiration of regulatory capital treatment for these issuances is the later of 20 years from the date of issuance or Jan. 1, 2042. The final rule becomes effective January 1, 2022.

NCUA Western Region Meeting
Following the American Association of Credit Union Leagues (AACUL) conference in Arizona recently, the California and Nevada Credit Union Leagues (along with other western region participants) met virtually with NCUA Western Region Director Cherie Freed to discuss examinations and other regional issues. Topics included:

  • NCUA Modernized Examination Tools (MERIT).
  • NCUA’s COVID-19 response.
  • New regulatory standards, such as risk-based capital, current expected credit losses (CECL), and subordinated debt/secondary capital.
  • Examinations and exam preparation, such as exam exits, virtual examination posture, joint exams with state regulators, and Information Technology Risk Examination for Credit Unions (InTREX-CU).

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