Regulatory Advocacy Update

​NCUA proposed rule to amend charitable donation accounts; proposed rule for automated valuation models; and request for climate related financial risk information. 

by Amy Kleinschmit, Chief Compliance Officer
​
There are a number of items open for comment that credit unions can weigh in on. Whether you want to submit your own comment letter or if you want to pass along your thoughts on a particular aspect of a proposal, any feedback you have is welcomed.

NCUA – Charitable Donations Accounts
At its May board meeting, the National Credit Union Administration (NCUA) issued a proposed rule to amend charitable donation account provisions to add “war veterans’ organizations” (“veterans’ organizations”), as defined under section 501(c)(19) of the Internal Revenue Code, to the definition of a “qualified charity” that a federal credit union may contribute to using a charitable donation account.

The NCUA is also interested to know if there are any other groups, entities, or organizations the Board should consider adding to the definition of a “qualified charity” to inform potential future rulemaking in this area.
The proposed rule can be found here and comments are due July 31, 2023.

A charitable donation account (CDA) is a hybrid charitable and investment vehicle that must meet certain criteria under NCUA rules/regulations, that FCUs may fund as a means to provide charitable contributions and donations to qualified charities. If a credit union funds a CDA that satisfies all of the conditions in the regulation, then the credit union may do so free from the investment limitations of the Federal Credit Union Act and NCUA part 703.
 
Proposed Rule – Automated Valuation Models
This interagency proposed rulemaking was issued by six regulatory agencies, which includes the NCUA and CFPB. The proposed rule can be found here and comments are due in 60 days.

This rulemaking relates to the Dodd-Frank Act in which it amended title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 to add a new section 1125 relating to the use of automated valuation models (AVMs) in valuing real estate collateral securing mortgage loans. Section 1125 defines an AVM as “any computerized model used by mortgage originators and secondary market issuers to determine the collateral worth of a mortgage secured by a consumer’s principal dwelling.”

Section 1125(c)(1) provides that compliance with regulations issued under this subsection shall be enforced by, "with respect to a financial institution, or subsidiary owned and controlled by a financial institution and regulated by a Federal financial institution regulatory agency, the Federal financial institution regulatory agency that acts as the primary Federal supervisor of such financial institution or subsidiary.” The preamble to the proposed rule clarifies that with regard to CUSOs, Federal Trade Commission, the CFPB, and state attorneys general would have enforcement authority over CUSOs, whether owned by a state or federally chartered credit union, in connection with a final AVM rule since NCUA does not have authority to supervise or examine subsidiaries owned and controlled by federally insured credit unions.

The NCUA’s proposed rule, which apply to both FCUs and Federally insured credit unions, would require that “mortgage originators and secondary market issuers that engage in credit decisions or covered securitization determinations themselves, or through or in cooperation with a third-party or affiliate, must adopt and maintain policies, practices, procedures, and control systems to ensure that automated valuation models used in these transactions adhere to quality control standards designed to: (a) Ensure a high level of confidence in the estimates produced; (b) Protect against the manipulation of data; (c) Avoid conflicts of interest; (d) Require random sample testing and reviews; and (e) Comply with applicable nondiscrimination laws.”

The agencies solicit responses to a number of questions (37 questions) in addition to the text of the proposed rulemaking, including inquiring “in addition to providing time for implementation, in what other ways should the agencies facilitate implementation for small entities?”
 
NCUA Request for Information – Climate Related Financial Risks
Reminder – earlier this year the NCUA issued a request for information and comment concerning climate-related financial risks, which can be found here. Comments are due June 26, 2023.

This Request for Information (RFI) follows the issuances of NCUA’s Research Note – “Estimating Credit Union Exposure to Climate-Related Physical Risks.” The research note found that 25 percent of credit unions, accounting for 34 percent of system-wide assets, are headquartered in areas at relatively high or very high risk of experiencing negative effects due to natural hazards. The report further notes that credit unions that are at relatively high and very high risk of experiencing negative consequences of weather and climate-related disasters tend to be located along the coasts, particularly in California, Texas, and Florida.

The RFI was approved by a 2-1 vote. Vice Chairman Hauptman explained during his remarks on the RFI that, “I think there are some ways this can go well but also quite a few ways this effort can unintentionally wind up doing harm to both the Share Insurance Fund and credit union members.” Hauptman outlined several points why he opposed the RFI, including, “Those closest to these natural disasters and changing markets are best positioned to understand and manage the risks; the history of unintended consequences of government interference in private markets; potential harm to credit union members; and all of these issues are already dealt with via existing workstreams, and the NCUA’s involvement could dull the market signals that make those workstreams function well.”

Chairman Harper asserted during his opening remarks, “the NCUA has a duty to ensure the institutions it oversees remain resilient against all material risks. Those risks include climate-related financial risks. This request for information is essential to furthering our understanding of these issues and their implications for the overall resiliency of individual credit unions, the vibrancy of the credit union system, and the strength of the National Credit Union Share Insurance Fund.” The Chairman went on to stress, “it is worth noting that the NCUA’s request is for informational purposes only. Responses to this request for information will not be used as part of the current NCUA examination and supervision program. Moreover, my fellow Board Members and I fully agree if there were a subsequent change in agency policy and supervision related to climate financial risk, that change would be agreed upon by Board action, similar to any other policy changes we make.”

Board member Hood confirmed that, “the RFI before us today does not change any NCUA policy or supervision for climate change. Changing policy will require a future Board action.” Adding, “For instance, when it comes to ESG regulations for credit unions, including climate change, I’m cautious about stepping in with regulatory solutions and certainly I am not comfortable with suggestions that regulators should be forcing a commitment to the ESG framework at this moment in time.”

The RFI looks at two categories of climate-related financial risks – namely physical risk and transaction risk. As explained in the RFI – “Physical risk refers to harm to people and property caused by discrete, climate-related events like hurricanes, wildfires, and heatwaves, as well as longer-term, chronic phenomena, including changes in precipitation patterns, sea level rise, and higher average temperatures. Transition risk refers to stress on institutions or sectors caused by measures taken to move towards a less carbon-intensive economy. This includes responding to public policy changes, adopting new technologies, and adapting to shifts in consumer and investor preferences, which may lead to higher costs and substantial shifts in asset values. If these changes occur in a disorderly fashion, the effect on individuals, businesses, communities, and financial institutions could be sudden and disruptive.”

As explained in the RFI – “the NCUA does not have expertise in climate science… the NCUA is seeking input that would strengthen its ability to identify and assess credit unions’ current and future climate and natural disaster risk. The NCUA is also seeking input on opportunities to enhance the agency’s supervision and regulation of each regulated entity’s management of such risks.”

The RFI asks 38 questions broken down into categories of physical risk; transition risk; operations; governance; business strategies; risk management; reporting and targets; climate-related opportunities; suggestions for NCUA; and data gathering. Finally, commenters are invited to submit any questions or comments not otherwise covered in the RFI that you would like NCUA to address.
 
NCUA Regulatory Review
Reminder – credit unions have until June 30 to submit feedback on the NCUA’s annual regulatory review. The NCUA reviews all of its existing regulations every three years. The NCUA’s Office of General Counsel maintains a rolling review schedule that identifies one-third of the NCUA’s existing regulations for review each year.
Comments regarding the below listed regulations need to be submitted to [email protected] by June 30, 2023. Please include the words “Regulatory Review (2023)” in the subject line. Per the announcement, it is “NCUA’s goal is to ensure that all of our regulations are clearly articulated and easily understood. Comments are welcome on that aspect, as well as substantive suggestions for regulatory changes.”

The following Parts of NCUA’s rules and regulations will be reviewed in 2023:
711 Management Official Interlocks
712 Credit Union Service Organizations (CUSOs)
713 Fidelity Bond and Insurance Coverage for Federally Insured Credit Unions
714 Leasing
715 Supervisory Committee Audits and Verifications
717 Fair Credit Reporting
721 Incidental Powers
722 Appraisals
723 Member Business Loans; Commercial Lending
724 Trustees and Custodians of Certain Tax-Advantaged Savings Plans
725 National Credit Union Administration Central Liquidity Facility
740 Accuracy of Advertising and Notice of Insured Status
741 Requirements for Insurance
745 Share Insurance and Appendix
746 Appeals Procedures
747 Administrative Actions, Adjudicative Hearings, Rules of Practice and Procedure, and Investigations