Samantha: Hello, this is Samantha Shares.
This episode covers N C U A Chairman Todd Harper's Written Testimony
Before the Senate Banking, Housing, and Urban Affairs Committee.
The following is an audio version of that written testimony.
This podcast is educational and is not legal advice.
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And now the testimony.
Chairman Brown, Ranking Member Scott, and members of the committee,
thank you for inviting me to discuss the work of the National Credit
Union Administration (N C U A).
The N C U A protects credit union member-owners and the safety and soundness
of the credit union system by managing risks to the National Credit Union Share
Insurance Fund (Share Insurance Fund).
In my testimony today, I will discuss the state of the credit union system, recent
efforts by the agency to strengthen the system, and four legislative requests.
State of the Credit Union System
Credit union performance during Twenty-Twenty-Three was mixed due
to increased market competition and rising interest rates.
Large, complex credit unions (those with assets greater than five hundred
million dollars) posted a decline in the aggregate return on average assets
stemming from deposit competition and increased use of wholesale funding.
In contrast, credit unions with assets less than or equal to five hundred
million dollars in assets have a more stable deposit base, which mitigates
the cost of funding increases.
While these credit unions generally experienced some deposit
decline, earnings remained stable.
Both groups increased net interest margins by reacting to interest rate
movements to benefit from higher yields on loans and investments.
In general, credit union liquidity appears to be stable, but the N C U
A is seeing signs of stress linked to the current interest rate environment.
This financial stress is reflected in the increasing number of
credit unions with a composite CAMELS code rating of 3, 4, and 5.
Assets in institutions with a composite CAMELS 3 rating increased from December
2022 to December Twenty-Twenty-Three, especially among large, complex
credit unions with greater than five hundred million dollars in assets.
Credit unions with composite CAMELS 4 and 5 ratings remained relatively
stable during Twenty-Twenty-Three.
Year over year, credit unions with a liquidity component
rating of three nearly doubled.
Just over three hundred credit unions experienced a decline in
the liquidity component rating from a 1 or 2 to a 3, 4, or 5.
Additionally, during Twenty-Twenty-Three, the number of credit unions with a
high liquidity risk rating tripled.
Credit Union System Performance
As of December, thirty one, Twenty-Twenty-Three, federally insured
credit unionsâ aggregate net worth ratio was 10 point 95 percent, an increase
of 17 basis points over the year.
There was continued year-over-year growth in assets and lending, albeit
at a slower pace, with the credit union systemâs total assets surpassing
2 point 2 trillion dollars and total loans outstanding reaching more
than 1 point 6 trillion dollars.
Insured shares and deposits increased slightly during Twenty-Twenty-Three,
ending the year almost 1 point 7 percent higher than one year earlier.
The growing financial strain on credit unionsâ balance sheets and consumer
financial stress due to elevated interest rates and economic uncertainty were
more noticeable in the fourth quarter.
The delinquency rate for total loans and leases rose to 0 point
83 percent in the last quarter of Twenty-Twenty-Three, the highest year-end
rate in the previous seven years.
The delinquency rate on credit cards and automobile loans rapidly increased
during Twenty-Twenty-Three, ending the year at 2 point eleven and 0
point nine percent, respectively.
It might be noted that the 2 point eleven percent rate for
credit cards was higher than rates observed during the Great Recession.
Additionally, the aggregate net charge-off rate on loans and leases
has risen over the last year, climbing to 0-point 61 percent in the
fourth quarter, reaching its highest point since June twenty-eighteen.
Funding costs for credit unions have increased significantly in the
rising interest rate environment.
Credit unions have increased their issuances of time deposits, leading
to total interest expenses growing substantially over the year.
As a result, the industryâs return on average assets has declined
over the prior year but remains satisfactory at 0-point 69 percent.
Additionally, the industry doubled its credit loss provision expense from 5 point
5 billion dollars in 2022 to 11 point 3 billion dollars in Twenty-Twenty-Three.
This shift was the combined result of the final implementation of the
Current Expected Credit Loss accounting methodology and rising expectations
of elevated problem loan levels.
Despite the loan deterioration over the year, earnings, net worth, and
reserves for credit losses indicate a resilient credit union industry.
External Factors Affecting the System
The N C U A is closely monitoring the economic landscape that credit
unions and their member-owners face.
Elevated prices and interest rates continue to negatively
affect some household budgets, leading to a deterioration in loan
performance and rising credit risk.
In addition, the prevalence of hybrid work environments continues to strain
commercial real estate lending.
Overall, the credit union system has modest exposure to this type
of lending; however, the N C U A is tracking specific credit unions with
material exposure to such loans.
Elevated interest rates and the challenging shape of the yield curve
continue to present liquidity and interest rate risks in the credit union
system, including at several of the four hundred and thirty two federally
insured credit unions with more than one billion dollars in assets.
Accordingly, the N C U A has emphasized the importance of liquidity risk
management and contingency planning in its industry communications.
The agency will continue to ensure credit unions conduct liquidity
and asset-liability management planning to address current
challenges and future uncertainties.
To mitigate potential risks and safeguard the Share Insurance Fund against
possible losses, the N C U A will also remain vigilant in monitoring credit
union performance through examinations, offsite monitoring, and supervision.
Additionally, the N C U A will take necessary action to protect
credit union member-owners and their deposits whenever required.
Artificial intelligence (A I), like every new technology,
offers both promise and peril.
The N C U A âs goal is to maximize and deliver on the former while identifying
and mitigating the risks of the latter.
Consistent with the Executive Order on the Safe, Secure, and Trustworthy
Development and Use of Artificial Intelligence, the N C U A is in the early
stages of researching, assessing, and developing plans to address opportunities
and risks associated with AI tools.
In Twenty-Twenty-Three, the N C U A issued guidance reminding credit unions
of their obligation to comply with the Equal Credit Opportunity Actâs
nondiscrimination requirements in using automated underwriting systems.
The N C U A also joined other federal financial regulators to issue a proposed
rule about automated valuation models incorporating fair lending principles.
While AI allows credit unions to automate certain functions like member
communication, fraud detection, and loan underwriting, it must be used
to ensure fairness, transparency, privacy, and consumer protection.
Share Insurance Fund Performance
Backed by the full faith and credit of the United States, the Share
Insurance Fund provides insurance coverage for individual accounts at
federally insured credit unions of up to TWO HUNDRED FIFTY THOUSAND DOLLARS.
As of December thirty one, Twenty-Twenty-Three, the Share
Insurance Fund insured 1 POINT 7 trillion DOLLARS in share deposits.
Notably, the Share Insurance Fund protects nearly 91.4 percent of total share
deposits in the credit union system.
In comparison, uninsured shares and deposits equaled nearly
161 POINT 4 billion DOLLARS at year-end Twenty-Twenty-Three or 8.6
percent of total share deposits.
The Share Insurance Fund continues to perform well, with
no premiums currently expected.
As of December thirty one, Twenty-Twenty-Three, the Share Insurance
Fund reported a year-to-date net income of TWO HUNDRED AND NINE MILLION DOLLARS,
a net position of TWENTY ONE POINT TWO billion DOLLARS, and an equity ratio of 1
POINT 30 percent, which is sufficient but below the 1.33 percent normal operating
level target set by the N C U A Board.
Given the liquidity events in Twenty-Twenty-Three, economic
conditions, and the growing stress in the credit union system from liquidity
and interest rate risks, the N C U A Board decided to build up the Share
Insurance Fundâs liquidity position.
The current overnight balance is FIVE POINT SIX billion DOLLARS.
The N C U A Board continues to monitor liquidity in the Share Insurance Fund.
State of the Central Liquidity Facility
Inflationary pressures, elevated interest rates, and liquidity risk all
underscore the importance of the N C U A âs Central Liquidity Facility (C L F).
The C L F is an important tool that acts as a shock absorber when
unexpected liquidity events occur.
Under the N C U A âs regulations, federally insured credit unions with
assets of TWO HUNDRED FIFTY million DOLLARS or more must establish and
document access to at least one contingent federal liquidity source
for emergency liquidity as part of their contingency funding plans.
This federal emergency liquidity backstop can be the C L F, the Federal
Reserveâs Discount Window, or both.
Credit unions with less than TWO HUNDRED FIFTY MILLION DOLLARS in assets
are not required to have membership with a contingent federal liquidity
source; however, they must identify external sources as part of their
liquidity policy or provide a written contingency funding plan that is
commensurate with their complexity, risk profile, and scope of operations.7
As of December thirty one, Twenty-Twenty-Three, the C L F had four
hundred and seven consumer credit union members, providing twenty point two
billion dollars in lending capacity.
These credit unions range in asset size from less than fifty million dollars
to more than ten billion dollars.
The C L F helps protect approximately three hundred seventy billion
dollars in credit union assets.
The more members the C L F has, the more effective it is as a liquidity facility.
In December twenty twenty-two, the C L F had a much greater total membership
of three thousand six hundred and seventy-three consumer credit unions
with a combined five hundred thirty seven billion dollars in member assets
and a lending capacity of twenty seven point five billion dollars.
This rapid decline in membership followed the expiration of the temporary
statutory enhancements that provided greater flexibility and affordability
to corporate credit unions to serve as agent members of the C L F to cover their
smaller credit union members, and that:
â¢ Increased the C L Fâs maximum legal borrowing authority;
â¢ Permitted access for corporate credit unions, as agent members,
to borrow for their own needs; and
â¢ Gave the N C U A Board the clarity and flexibility about the loans it could
approve by removing the phrase, âthe Board shall not approve an application
for credit the intent of which is to expand credit union portfolios.â
These enhancements expired on January 1, Twenty-Twenty-Three, resulting in
three thousand three hundred and twenty two credit unions with less than two
hundred and fifty million dollars in assets losing access to the C L F.
To address this expiration and growing liquidity risks, the N C U A Board has
unanimously requested that Congress allow corporate credit unions the flexibility
to purchase capital stock in the C L F for a subset of their members, to
provide their smaller credit union members with access to the facility.
The Congressional Budget Office has scored this and the other C L
F reforms at no cost to taxpayers.
N C U A âs Efforts to Protect and Strengthen the Credit Union System
In the past few months, the N C U A has taken actions to respond to cybersecurity
risk; enhance consumer financial protection; support minority depository
institutions; improve the credit union systems and the N C U A âs diversity,
equity, inclusion, and accessibility efforts; and has considered rulemaking
activities that strengthen the system.
Enhancing Cybersecurity
Cybersecurity threats within the financial services industry are
high and expected to remain so.
To maintain vigilance against these threats, the N C U
A is ensuring consistency, transparency, and accountability
in its cybersecurity examination program and related activities.
The N C U A âs recently implemented cyber incident reporting rule has proven helpful
to the agency and credit union industry.
The final rule requires a federally insured credit union to report a
substantial cyber incident to the N C U A as soon as possible but no
later than seventy-two hours after the credit union reasonably believes a
reportable cyber incident has occurred.
In the first thirty days after the rule became effective, the N C U A
received one hundred and forty-six total incident reports, exceeding all
previous reporting from the prior year.
As of March, twenty twenty four, the total number of incident
reports is just under one thousand.
The data collected has significantly improved our capacity to identify
trends, vulnerabilities, and potential risks that could affect
the entire sectorâs cybersecurity.
This, in turn, has allowed us to develop strategies to enhance
cyber resilience across the board.
Moreover, this information will help us to evaluate the effectiveness
of current cybersecurity practices among credit unions, leading to more
informed regulatory guidance and better mitigation of future cyber risks.
More than 70 percent of these incident reports involve third-party
providers and credit union service organizations (CUSOs).
The N C U A also actively communicates with credit unions about the
increased likelihood of cyberattacks resulting from geopolitical
tensions and other cyber events.
Credit unions of all sizes are a part of U.
S.
critical infrastructure and will likely remain consistent targets for certain
criminals, as well as our nationâs most capable foreign adversaries, and
as such, should implement appropriate controls in the technology they
use to deliver member services.
Maintaining Consumer Financial Protection
An essential part of the N C U A âs mission is to examine credit unions with
ten billion dollars or less in assets for compliance with consumer financial
protection laws and regulations.
The agencyâs consumer compliance efforts are integral to ensuring the credit
union system remains safe and sound.
In Twenty-twenty-four, the agencyâs consumer financial protection supervisory
priorities include overdraft programs, fair lending, and automobile lending,
including assessing compliance with Truth in Lending Act requirements and reviewing
credit unionsâ practices related to Guaranteed Asset Protection Insurance.
This year, the N C U A is also focusing on credit union compliance with
the Flood Disaster Protection Act, including its disclosure requirements.
In addition, the agency continues to review credit union overdraft programs
and non-sufficient funds fee practices.
Credit union member-owners and the public should have clear visibility
into the income a credit union generates from overdraft and non-sufficient funds
fees charged to its member-owners.
Therefore, beginning with the Twenty-twenty-four first quarter
Call Report, the N C U A required federally insured credit unions with
more than 1 billion dollars in assets to disclose, separately, income from
overdraft and non-sufficient funds fees.
These Call Report changes will allow credit unions to benchmark
their overdraft programs against other financial institutions.
The N C U A âs supervision of these services aims to create a more equitable
system that supports financial stability for credit union members, improves
transparency, and advances the statutory mission of credit unions to meet the
credit and savings needs of their members, especially those of modest means.
Furthermore, the N C U A is conducting targeted fair lending
examinations at federal credit unions to assess compliance with federal
fair lending laws and regulations.
These reviews are critical to identifying discrimination and economic equity.
In the fair lending examinations conducted in Twenty-Twenty-Three, the
N C U A identified pattern or practice of discrimination violations, illegal
redlining, indirect lending pricing concerns, systemic Home Mortgage
Disclosure Act violations, Regulation B notification and government monitoring
information violations, and numerous instances of inadequate fair lending
compliance management systems.
In Twenty-Twenty-Three, the N C U A referred six credit unions to the
Department of Justice for discrimination based on age or marital status.
These referrals impacted over fifty-five thousand consumers, and associated
remediation expenses exceeded five hundred and seventy-five thousand dollars.
In February, the N C U A joined the other Federal Financial Institution
Examination Council agencies to issue a statement of examination principles
related to valuation discrimination and bias in residential real estate lending.
The principles will assess whether credit unionsâ compliance and risk
management practices are sufficient to identify and mitigate discrimination
or bias in their residential real estate valuation practices.
As part of its consumer financial protection efforts, the N C U A âs
Consumer Assistance Center resolves consumer complaints against federal
credit unions with total assets of ten billion dollars or less and, in
certain instances, federally insured, state-chartered credit unions.
In Twenty-Twenty-Three, the Consumer Assistance Center responded to 12,276
written complaints, 884 inquiries, 35,098 telephone calls, and recovered
over one point one million dollars in monetary benefits for complaints from
consumers and credit unions concerning consumer financial protection regulations.
Finally, the N C U A regularly offers webinars promoting financial
education and economic equity.
Over the past year, the agency has hosted webinars on cybersecurity and
identity protection, the IRSâs Volunteer Income Tax Assistance program, appraisal
bias, elder financial exploitation, and closing the racial wealth gap
and increasing financial equity.
The N C U A also released the Money Basics Guides, a series of learning
tools developed to assist financial educators, credit unions, and other
financial institutions with promoting financial literacy in their communities.
The guides are also designed to provide consumers with practical
skills to manage their money and increase their financial capability.
The series includes guides on draft and share accounts, saving and budgeting,
and building and maintaining credit.
Lastly, the agency participates in national financial literacy initiatives,
including the interagency Financial Literacy and Education Commission.
Supporting Minority Depository Institutions
Minority depository institutions (M D Iâs) play a crucial role in providing safe,
fair and affordable financial services to people with modest means, especially
minority individuals and communities that have traditionally been underserved
by the financial services system.
At the end of the fourth quarter of Twenty-Twenty-Three, there were 492
M D I credit unionsâabout one in ten of all federally insured credit
unionsâserving more than 6.5 million members and holding assets of more
than eighty eight billion dollars.
Although M D Iâs are typically smaller institutions, with average assets of
approximately 181 million dollars, they are solid performers with a return on
average assets, net worth ratio, and net interest margin comparable to or
exceeding those of credit unions overall.
The N C U A âs M D I Preservation Program, in place since twenty
fifteen, assists in cultivating and sustaining existing M D IâS.
In 2022, the N C U A launched the Small Credit Union and M D I Support Program to
help M D IâS with operational challenges such as staff training, examination
concerns, and earnings improvement.
For Twenty-twenty-four, the N C U A is allocating four thousand six hundred staff
hours across its three regional offices to support and consult with M D IâS.
In the Twenty-Twenty-Three grant round, 42 M D Iâs received over 1.4 million
dollars in technical assistance grants, a five-fold increase from the previous year.
Earlier that year, Congress authorized all M D Iâs to be eligible for
Community Development Revolving Loan Fund grants and loans.
Prior to Twenty-Twenty-Three, M D Iâs had to meet the low-income
credit union designation to qualify.
This authorization was not extended in the recent appropriation, and I respectfully
request that lawmakers reinstate C D R L F eligibility for all M D Iâs.
M D Iâs are very small credit unions with average assets of 180 million
dollars and, in many circumstances, are supported by unpaid volunteer staff.
Due to limited resources, C D R L F grants assist M D IâS in remaining
competitive by starting a new product or service such as ATMs, online
banking, and other products consumers expect from a financial institution.
In addition, the N C U A hosted an M D I Awareness Month in Twenty-Twenty-Three to
showcase the work of these credit unions.
Similar efforts will continue in Twenty-twenty-four.
In October, the agency hosted an M D I Symposium that discussed
how it could better serve M D IâS, and the N C U A plans to hold a
similar event again this year.
The N C U A intends to use information from this outreach to further improve
its M D I Preservation Program.
Advancing Diversity, Equity, Inclusion, and Accessibility
The N C U A is fully committed to fostering diversity, equity, inclusion,
and accessibility (D E I A) within the agency and the credit union system.
Through external initiatives like the agencyâs DEI Summit and internal efforts
like employee resource groups, outreach to potential diverse suppliers, and hiring
initiatives to promote a diverse pipeline of applicants, the N C U A advances
important D E I A principles within the agency and across the credit union system.
These efforts are outlined in the N C U A âs Diversity, Equity, Inclusion,
and Accessibility Strategic Plan Twenty-twenty-four TO TWENTY TWENTY
SIX, released earlier this year.
The four strategic goals in this plan will guide the N C U A âs efforts
and reinforce its commitment to D E I A as a business imperative for the
agency and the credit union industry.
In doing so, the agency and the broader credit union community will
be well-positioned for significant, long-term, and sustainable progress.
As shown in the agencyâs Federal Employee Viewpoint Survey results, the
N C U A draws strength from a broad range of talents and perspectives.
The agency uses data from the U.S.
Office of Personnel Managementâs Federal Employee Viewpoint Survey,
including the Diversity, Equity, Inclusion, and Accessibility
Index, to inform its data-driven D E I A strategies and activities.
In Twenty-Twenty-Three, the D E I A index revealed that 77 percent of N C U A
respondents reported positive perceptions of agency practices related to D E I A.
The government-wide D E I A index average was 72 percent
and 76 percent for medium-sized agencies in Twenty-Twenty-Three.
The N C U A also supports workforce diversity, equity, inclusion,
and accessibility through its training, outreach and recruitment,
special emphasis programs, and employee resource groups (E R G).
During fiscal year Twenty-Twenty-Three, E R Gâs expanded their presence in
the N C U A communityâ41 POINT 4 percent of N C U A employees are
members of E R Gâs, putting the N C U A well above the industry-standard
E R G membership goal of 10 percent of an organizationâs total workforce.
In addition, the N C U A routinely recruits employees with diverse
backgrounds and seeks to ensure broad applicant pools for vacancies.
These diversity recruitment efforts aim to attract and retain
highly qualified individuals from historically underrepresented groups.
The agency continues to build a pipeline of diverse talent in attracting, hiring,
and retaining a diverse workforce.
Since TWENTY SEVENTEEN, the N C U A has consistently exceeded the federal
employment rate goals for employees with disabilities and employees with
targeted disabilities, with 17 POINT 0 percent of individuals reporting
disabilities and 4 POINT 7 percent reporting targeted disabilities.
The N C U A supports accessibility through its hiring efforts,
reasonable accommodations program, Disability Solutions Desk, and
Section 508 compliance program.
In GSAâs Twenty-Twenty-Three report to Congress on compliance with Section
508 of the Rehabilitation Act of NINETEEN SEVENTY THREE, the N C U
A had a maturity level of Moderate and a conformance level of Very High.
In Twenty-twenty-four, training, human capital, culture, and
leadership will be the agencyâs focus areas for further improvement
in its compliance with Section 508.
The N C U A continues to build a diverse supplier network to obtain
innovative solutions and the best value, particularly in technology
and information technology solutions.
The agency is committed to supporting minority- and women-owned businesses
through our supplier diversity program.
Diverse suppliers and vendors play a vital role in the economic success
of small businesses and diverse communities, and in the success of
the N C U A , by bringing in new perspectives and delivering innovation.
By fiscal year-end Twenty-Twenty-Three, the agency awarded 47 POINT 5 percent
of reportable contract dollars to minority- or women-owned businesses.
This performance represents a strong, sustained showing for the N C U A and
places it among the top performers among federal financial regulatory agencies.
The N C U A also provides credit unions with a diversity self-assessment
tool to help measure their progress in applying D E I A principles.
Credit unions may assess their D E I A policies and programs through
this voluntary credit union diversity self-assessment offered annually.
Credit union voluntary self-assessments have no bearing on CAMELS rating and
examiners cannot access the data.
The N C U A reports credit union diversity data only in the aggregate.
The agency encourages credit unions to use this tool to support and evaluate
their D E I A efforts and benchmark themselves with peer institutions.
Credit unions can use the self-assessment to establish a baseline
for action, such as committing to develop new products and services
to address the needs of communities of color, increasing investment in
underserved areas, and improving community marketing and outreach.
Finally, from July 9-11, the N C U A will host its annual
Diversity, Equity, and Inclusion Summit in Minneapolis, Minnesota.
This event provides a forum for hundreds of stakeholders to attend
workshops, network, share best practices, and meet with leaders
on ways to expand D E I A efforts.
Rulemaking Activities
In November, the N C U A Board unanimously approved a final rule that adds
âwar veteransâ organizationsâ to the definition of a âqualified charityâ that
a federal credit union may contribute to using a charitable donation account.
Specifically, the final rule adds a post or organization of past or present members
of the Armed Forces of the United States, or an auxiliary unit or society of, or
a trust or foundation for, any such post or organization recognized as exempt
from taxation under section 501(c)(19) of the Internal Revenue Code to the
definition of a âqualified charityâ that a federal credit union may contribute
to using a charitable donation account.
With this final rule, the N C U A took an important step in honoring
our nationâs many veterans.
In March of this year, the N C U A Board finalized updates to the
Interpretive Ruling and Policy Statement that governs the agencyâs
Minority Depository Institution (M D I) Preservation Program for credit unions.
M D IâS play an important and unique role in promoting the economic viability of
minority and underserved communities.
Through its M D I Preservation Program, the N C U A engages in
a range of efforts to preserve M D IâS and foster their success.
The M D I Preservation Program is designed to comply with section 308
of the Financial Institutions Reform, Recovery and Enforcement Act of 1989.
The updates included incorporating recent program initiatives, referencing
examiner guidance, explaining how the N C U A will review an M D Iâs designation
status during routine evaluations, and adding new subsections on engagement,
technical assistance, M D I examinations, Community Development Revolving Loan
Fund grants and loans, training and education, and M D I preservation.
These changes to the structure and current administration of the M D I
Program will better enable hundreds of M D I credit unions to meet the
needs of their members and communities.
In addition, the N C U A has begun plans to review credit union records
preservation requirements to understand how the agency can update its records
preservation program regulations and accompanying guidelines.
The N C U A will also be considering a rulemaking to address succession
planning in federal credit unions.
Legislative Requests
Certain amendments to the Federal Credit Union Act would allow
the N C U A to do its job more effectively and safeguard credit union
member-owners, the Share Insurance Fund, and ultimately the taxpayers
who back the Share Insurance Fund.
Restoration of Third-Party Vendor Examination Authority
The N C U A âs lack of third-party vendor examination authority is a regulatory
blind spot that must be addressed.
Unlike the federal prudential banking regulators, the N C U A lacks the
authority to examine credit union third-party vendors and CUSOs.
Yet, the risks associated with credit union reliance on third-party services
are expanding, increasing the potential for losses to the Share Insurance Fund.
The absence of third-party vendor examination authority limits
the N C U A âs ability to assess and mitigate potential risks
associated with these vendors.
Vendors typically decline requests or refuse to implement recommended
actions, exacerbating credit unionsâ exposure to operational, cybersecurity,
and compliance risks that can arise from these relationships.
Without the authority to supervise and enforce corrective actions and
visibility into these entities, the N C U A cannot effectively protect
credit unions and their member-owners.
This regulatory blind spot has already had a negative impact on the industry.
Between 2008 and 2015, nine CUSOs contributed to material losses to the
Share Insurance Fund, causing losses in 24 credit unions, some of which failed.
According to N C U A staff calculations, at least 73 credit unions incurred
losses between TWO THOUSAND AND SEVEN and TWENTY-TWENTY as losses
at CUSOs rolled onto credit union ledgers and led to liquidations.
And, last yearsâ third-party core service provider disruption affecting
60 credit unions illuminated the N C U A âs challenges as it tried to
mitigate issues on behalf of impacted credit unions and their member-owners.
Independent entities such as the Government Accountability Office, the
Financial Stability Oversight Council, and the N C U A âs Office of Inspector
General have identified this deficiency as a significant obstacle to the N
C U A âs mission to safeguard credit union members and the financial system.
All of them have recommended that Congress provide the N C U A with this authority.
Moreover, this lack of vendor authority also impacts the nationâs critical
economic infrastructure and national security, as the interconnectedness of
financial services expands with other industries and national infrastructure,
making any exposure potentially perilous.
Currently, one in three Americans use a credit union for basic financial
services, and there are many credit unions with fields of membership that
are tied to high-risk populations such as congressional staff, the U.S.
military, the State Department, and members of the U.S.
Intelligence Community.
Many of these credit unions utilize third-party service providers to
provide critical member services and a sophisticated cyberattack against a
vendor can have measurable impacts on the personnel who are critical to government
operations and national security.
By current estimates, roughly 90 percent (or approximately ONE POINT NINE
Trillion DOLLARS) of industry assets are in some way touched or managed by
unregulated third-party service providers.
If Congress grants the N C U A examination authority over credit
union third-party vendors, risks would be considerably mitigated.
Furthermore, credit unions would have access to N C U A examination
summaries when conducting their own due diligence of vendors and there
would be fewer requests from the N C U A to credit unions to intervene
with vendors experiencing problems.
If granted this authority, the N C U A would implement a risk-based examination
program focusing on services that relate to safety and soundness, information
security, cybersecurity, the Bank Secrecy Act and Anti-Money Laundering Act
compliance, consumer financial protection, and areas posing significant financial
risk for the Share Insurance Fund.
Central Liquidity Facility Reforms
The N C U A Board, as noted earlier, has unanimously supported a proposed
statutory change that would restore the ability of corporate credit unions to
serve as C L F agents on behalf of a subset of their member credit unions.
In the first session of the 118th Congress, lawmakers introduced a
bipartisan bill allowing corporate credit unions to buy C L F capital stock on
behalf of a subset of their members.
This bill enables corporate credit unions to contribute capital to provide
coverage for smaller members with assets under 250 million DOLLARS.
As liquidity risks within the credit union system continue to
rise, prompt consideration of this bill would help protect the system
from future liquidity events.
Additional Flexibility for Administering the Share Insurance Fund
Liquidity risks within the credit union system and rising interest rate risk
highlight N C U A âs need for flexibility.
Therefore, N C U A urges Congress to amend the Federal Credit Union
Act to remove limitations on the Share Insurance Fundâs equity ratio
and ability to assess premiums.
This would provide parity with the Federal Deposit Insurance Corporation
and enable better fund management.
Specifically, amendments should remove the limitations on assessing Share Insurance
Fund premiums when the equity ratio of the fund is equal to or greater than 1 POINT
30 percent and if the premium charged exceeds the amount necessary to restore
the equity ratio to 1 POINT 30 percent.
Further, a statutory change should remove the 1 POINT 5 percent ceiling for the
Share Insurance Fundâs equity ratio from the current statutory definition of
ânormal operating level,â which limits the Boardâs ability to establish a higher
normal operating level for the fund.
This approach would prevent credit unions from impairing their one percent
contributed capital deposit or paying premiums during times of economic stress.
Additionally, these amendments would enable the N C U A Board to proactively
manage the Share Insurance Fund using a counter-cyclical approach, creating
reserves during economic upswings and ensuring sufficient funds are
available throughout economic downturns.
Increase Grant Assistance for the Community Development Revolving Loan Fund
Congress created the C D R L F program to stimulate economic
development in low-income communities served by credit unions.
Through its stewardship of the C D R L F, the N C U A makes technical assistance
grants to eligible credit unions for a variety of initiatives, including,
but not limited to, expanding outreach to underserved populations, improving
digital services and cybersecurity, staff training, and capacity-building programs.
The N C U A requests Congress increase the appropriation for this vital program.
Although relatively small in size, these grants make a big difference to
low-income and minority credit unions working to provide more and better
services to their members and communities.
The N C U A does not use appropriated funds to administer the C D R L F program.
Conclusion
The N C U A is prepared to manage the effects of the credit
union systemâs ever-changing economic and business landscape.
The agency will continuously monitor credit union performance and collaborate
with other federal financial institution regulators to ensure the stability and
resilience of our nationâs financial services system and economy and to
ensure that consumers are protected.
This concludes the N C U A Chairman Todd Harper's Written Testimony
Before the Senate Banking, Housing, and Urban Affairs Committee
If your Credit union could use assistance with your exam, reach out to Mark Treichel
on LinkedIn, or at mark Treichel dot com.
This is Samantha Shares and we Thank you for listening.