WEBVTT NOTE This file was generated by Descript 00:00:00.480 --> 00:00:02.380 Samantha: Hello, this is Samantha Shares. 00:00:03.020 --> 00:00:06.990 This episode covers N C U A Chairman Todd Harper's Written Testimony 00:00:06.990 --> 00:00:10.500 Before the Senate Banking, Housing, and Urban Affairs Committee. 00:00:11.194 --> 00:00:14.164 The following is an audio version of that written testimony. 00:00:14.744 --> 00:00:17.934 This podcast is educational and is not legal advice. 00:00:18.414 --> 00:00:22.404 We are sponsored by Credit Union Exam Solutions Incorporated, whose 00:00:22.404 --> 00:00:25.464 team has over two hundred and Forty years of National Credit 00:00:25.464 --> 00:00:27.304 Union Administration experience. 00:00:27.814 --> 00:00:31.494 We assist our clients with N C U A so they save time and money. 00:00:31.934 --> 00:00:35.904 If you are worried about a recent, upcoming or in process N C U A 00:00:35.904 --> 00:00:40.194 examination, reach out to learn how they can assist at Mark Treichel DOT COM. 00:00:40.704 --> 00:00:45.064 Also check out our other podcast called With Flying Colors where we provide tips 00:00:45.064 --> 00:00:47.654 on how to achieve success with N C U A. 00:00:48.354 --> 00:00:49.444 And now the testimony. 00:00:50.200 --> 00:00:53.670 Chairman Brown, Ranking Member Scott, and members of the committee, 00:00:53.970 --> 00:00:57.240 thank you for inviting me to discuss the work of the National Credit 00:00:57.240 --> 00:00:59.400 Union Administration (N C U A). 00:01:00.095 --> 00:01:04.555 The N C U A protects credit union member-owners and the safety and soundness 00:01:04.555 --> 00:01:08.945 of the credit union system by managing risks to the National Credit Union Share 00:01:08.945 --> 00:01:11.085 Insurance Fund (Share Insurance Fund). 00:01:11.635 --> 00:01:16.405 In my testimony today, I will discuss the state of the credit union system, recent 00:01:16.405 --> 00:01:20.935 efforts by the agency to strengthen the system, and four legislative requests. 00:01:21.553 --> 00:01:23.333 State of the Credit Union System 00:01:24.055 --> 00:01:27.195 Credit union performance during Twenty-Twenty-Three was mixed due 00:01:27.195 --> 00:01:30.345 to increased market competition and rising interest rates. 00:01:30.935 --> 00:01:34.895 Large, complex credit unions (those with assets greater than five hundred 00:01:34.895 --> 00:01:39.075 million dollars) posted a decline in the aggregate return on average assets 00:01:39.155 --> 00:01:43.075 stemming from deposit competition and increased use of wholesale funding. 00:01:43.605 --> 00:01:47.805 In contrast, credit unions with assets less than or equal to five hundred 00:01:47.805 --> 00:01:52.135 million dollars in assets have a more stable deposit base, which mitigates 00:01:52.135 --> 00:01:53.905 the cost of funding increases. 00:01:54.265 --> 00:01:57.185 While these credit unions generally experienced some deposit 00:01:57.185 --> 00:01:59.255 decline, earnings remained stable. 00:01:59.825 --> 00:02:03.575 Both groups increased net interest margins by reacting to interest rate 00:02:03.575 --> 00:02:07.205 movements to benefit from higher yields on loans and investments. 00:02:07.882 --> 00:02:12.242 In general, credit union liquidity appears to be stable, but the N C U 00:02:12.242 --> 00:02:15.942 A is seeing signs of stress linked to the current interest rate environment. 00:02:16.622 --> 00:02:19.672 This financial stress is reflected in the increasing number of 00:02:19.672 --> 00:02:24.002 credit unions with a composite CAMELS code rating of 3, 4, and 5. 00:02:24.552 --> 00:02:28.972 Assets in institutions with a composite CAMELS 3 rating increased from December 00:02:28.972 --> 00:02:33.672 2022 to December Twenty-Twenty-Three, especially among large, complex 00:02:33.672 --> 00:02:37.472 credit unions with greater than five hundred million dollars in assets. 00:02:37.872 --> 00:02:42.042 Credit unions with composite CAMELS 4 and 5 ratings remained relatively 00:02:42.042 --> 00:02:43.772 stable during Twenty-Twenty-Three. 00:02:44.302 --> 00:02:47.372 Year over year, credit unions with a liquidity component 00:02:47.372 --> 00:02:48.982 rating of three nearly doubled. 00:02:49.392 --> 00:02:52.572 Just over three hundred credit unions experienced a decline in 00:02:52.572 --> 00:02:56.772 the liquidity component rating from a 1 or 2 to a 3, 4, or 5. 00:02:57.292 --> 00:03:00.912 Additionally, during Twenty-Twenty-Three, the number of credit unions with a 00:03:00.912 --> 00:03:02.952 high liquidity risk rating tripled. 00:03:03.749 --> 00:03:05.569 Credit Union System Performance 00:03:06.302 --> 00:03:10.062 As of December, thirty one, Twenty-Twenty-Three, federally insured 00:03:10.062 --> 00:03:15.162 credit unions’ aggregate net worth ratio was 10 point 95 percent, an increase 00:03:15.162 --> 00:03:17.272 of 17 basis points over the year. 00:03:17.872 --> 00:03:21.662 There was continued year-over-year growth in assets and lending, albeit 00:03:21.662 --> 00:03:25.762 at a slower pace, with the credit union system’s total assets surpassing 00:03:25.762 --> 00:03:29.642 2 point 2 trillion dollars and total loans outstanding reaching more 00:03:29.642 --> 00:03:31.692 than 1 point 6 trillion dollars. 00:03:32.082 --> 00:03:35.982 Insured shares and deposits increased slightly during Twenty-Twenty-Three, 00:03:36.412 --> 00:03:40.342 ending the year almost 1 point 7 percent higher than one year earlier. 00:03:41.044 --> 00:03:44.984 The growing financial strain on credit unions’ balance sheets and consumer 00:03:44.984 --> 00:03:49.244 financial stress due to elevated interest rates and economic uncertainty were 00:03:49.244 --> 00:03:51.104 more noticeable in the fourth quarter. 00:03:51.664 --> 00:03:55.354 The delinquency rate for total loans and leases rose to 0 point 00:03:55.354 --> 00:03:59.694 83 percent in the last quarter of Twenty-Twenty-Three, the highest year-end 00:03:59.694 --> 00:04:01.484 rate in the previous seven years. 00:04:01.984 --> 00:04:06.114 The delinquency rate on credit cards and automobile loans rapidly increased 00:04:06.114 --> 00:04:09.954 during Twenty-Twenty-Three, ending the year at 2 point eleven and 0 00:04:09.954 --> 00:04:11.844 point nine percent, respectively. 00:04:12.354 --> 00:04:15.074 It might be noted that the 2 point eleven percent rate for 00:04:15.074 --> 00:04:18.654 credit cards was higher than rates observed during the Great Recession. 00:04:19.254 --> 00:04:22.854 Additionally, the aggregate net charge-off rate on loans and leases 00:04:22.854 --> 00:04:27.254 has risen over the last year, climbing to 0-point 61 percent in the 00:04:27.254 --> 00:04:31.014 fourth quarter, reaching its highest point since June twenty-eighteen. 00:04:31.771 --> 00:04:35.151 Funding costs for credit unions have increased significantly in the 00:04:35.151 --> 00:04:36.841 rising interest rate environment. 00:04:37.411 --> 00:04:41.291 Credit unions have increased their issuances of time deposits, leading 00:04:41.291 --> 00:04:44.701 to total interest expenses growing substantially over the year. 00:04:45.261 --> 00:04:48.871 As a result, the industry’s return on average assets has declined 00:04:48.871 --> 00:04:53.791 over the prior year but remains satisfactory at 0-point 69 percent. 00:04:54.131 --> 00:04:58.551 Additionally, the industry doubled its credit loss provision expense from 5 point 00:04:58.621 --> 00:05:03.661 5 billion dollars in 2022 to 11 point 3 billion dollars in Twenty-Twenty-Three. 00:05:04.241 --> 00:05:07.501 This shift was the combined result of the final implementation of the 00:05:07.501 --> 00:05:12.021 Current Expected Credit Loss accounting methodology and rising expectations 00:05:12.021 --> 00:05:13.961 of elevated problem loan levels. 00:05:14.521 --> 00:05:18.481 Despite the loan deterioration over the year, earnings, net worth, and 00:05:18.481 --> 00:05:22.481 reserves for credit losses indicate a resilient credit union industry. 00:05:23.210 --> 00:05:25.320 External Factors Affecting the System 00:05:26.010 --> 00:05:29.950 The N C U A is closely monitoring the economic landscape that credit 00:05:29.950 --> 00:05:32.100 unions and their member-owners face. 00:05:32.640 --> 00:05:35.690 Elevated prices and interest rates continue to negatively 00:05:35.690 --> 00:05:39.240 affect some household budgets, leading to a deterioration in loan 00:05:39.240 --> 00:05:41.320 performance and rising credit risk. 00:05:41.880 --> 00:05:45.740 In addition, the prevalence of hybrid work environments continues to strain 00:05:45.740 --> 00:05:47.450 commercial real estate lending. 00:05:47.760 --> 00:05:51.430 Overall, the credit union system has modest exposure to this type 00:05:51.430 --> 00:05:56.310 of lending; however, the N C U A is tracking specific credit unions with 00:05:56.310 --> 00:05:58.410 material exposure to such loans. 00:05:59.127 --> 00:06:02.517 Elevated interest rates and the challenging shape of the yield curve 00:06:02.517 --> 00:06:06.347 continue to present liquidity and interest rate risks in the credit union 00:06:06.347 --> 00:06:10.217 system, including at several of the four hundred and thirty two federally 00:06:10.217 --> 00:06:13.877 insured credit unions with more than one billion dollars in assets. 00:06:14.407 --> 00:06:18.407 Accordingly, the N C U A has emphasized the importance of liquidity risk 00:06:18.407 --> 00:06:22.117 management and contingency planning in its industry communications. 00:06:22.487 --> 00:06:26.267 The agency will continue to ensure credit unions conduct liquidity 00:06:26.347 --> 00:06:29.477 and asset-liability management planning to address current 00:06:29.477 --> 00:06:31.587 challenges and future uncertainties. 00:06:32.286 --> 00:06:36.106 To mitigate potential risks and safeguard the Share Insurance Fund against 00:06:36.106 --> 00:06:40.996 possible losses, the N C U A will also remain vigilant in monitoring credit 00:06:40.996 --> 00:06:45.376 union performance through examinations, offsite monitoring, and supervision. 00:06:45.866 --> 00:06:49.536 Additionally, the N C U A will take necessary action to protect 00:06:49.536 --> 00:06:53.156 credit union member-owners and their deposits whenever required. 00:06:53.927 --> 00:06:57.217 Artificial intelligence (A I), like every new technology, 00:06:57.367 --> 00:06:59.167 offers both promise and peril. 00:06:59.827 --> 00:07:04.377 The N C U A ’s goal is to maximize and deliver on the former while identifying 00:07:04.377 --> 00:07:06.177 and mitigating the risks of the latter. 00:07:06.577 --> 00:07:10.387 Consistent with the Executive Order on the Safe, Secure, and Trustworthy 00:07:10.387 --> 00:07:14.867 Development and Use of Artificial Intelligence, the N C U A is in the early 00:07:14.867 --> 00:07:19.447 stages of researching, assessing, and developing plans to address opportunities 00:07:19.447 --> 00:07:21.847 and risks associated with AI tools. 00:07:22.574 --> 00:07:26.854 In Twenty-Twenty-Three, the N C U A issued guidance reminding credit unions 00:07:26.854 --> 00:07:30.474 of their obligation to comply with the Equal Credit Opportunity Act’s 00:07:30.474 --> 00:07:34.364 nondiscrimination requirements in using automated underwriting systems. 00:07:34.884 --> 00:07:39.444 The N C U A also joined other federal financial regulators to issue a proposed 00:07:39.444 --> 00:07:44.034 rule about automated valuation models incorporating fair lending principles. 00:07:44.294 --> 00:07:48.284 While AI allows credit unions to automate certain functions like member 00:07:48.284 --> 00:07:52.484 communication, fraud detection, and loan underwriting, it must be used 00:07:52.484 --> 00:07:56.694 to ensure fairness, transparency, privacy, and consumer protection. 00:07:57.437 --> 00:07:59.327 Share Insurance Fund Performance 00:08:00.013 --> 00:08:03.413 Backed by the full faith and credit of the United States, the Share 00:08:03.413 --> 00:08:07.013 Insurance Fund provides insurance coverage for individual accounts at 00:08:07.063 --> 00:08:10.853 federally insured credit unions of up to TWO HUNDRED FIFTY THOUSAND DOLLARS. 00:08:11.433 --> 00:08:14.463 As of December thirty one, Twenty-Twenty-Three, the Share 00:08:14.463 --> 00:08:18.563 Insurance Fund insured 1 POINT 7 trillion DOLLARS in share deposits. 00:08:19.173 --> 00:08:23.813 Notably, the Share Insurance Fund protects nearly 91.4 percent of total share 00:08:23.813 --> 00:08:25.883 deposits in the credit union system. 00:08:26.303 --> 00:08:29.763 In comparison, uninsured shares and deposits equaled nearly 00:08:29.763 --> 00:08:34.633 161 POINT 4 billion DOLLARS at year-end Twenty-Twenty-Three or 8.6 00:08:34.633 --> 00:08:36.543 percent of total share deposits. 00:08:37.201 --> 00:08:40.301 The Share Insurance Fund continues to perform well, with 00:08:40.301 --> 00:08:42.141 no premiums currently expected. 00:08:42.691 --> 00:08:46.231 As of December thirty one, Twenty-Twenty-Three, the Share Insurance 00:08:46.231 --> 00:08:50.461 Fund reported a year-to-date net income of TWO HUNDRED AND NINE MILLION DOLLARS, 00:08:50.801 --> 00:08:55.531 a net position of TWENTY ONE POINT TWO billion DOLLARS, and an equity ratio of 1 00:08:55.531 --> 00:09:00.591 POINT 30 percent, which is sufficient but below the 1.33 percent normal operating 00:09:00.591 --> 00:09:03.071 level target set by the N C U A Board. 00:09:03.541 --> 00:09:06.571 Given the liquidity events in Twenty-Twenty-Three, economic 00:09:06.571 --> 00:09:10.641 conditions, and the growing stress in the credit union system from liquidity 00:09:10.641 --> 00:09:14.851 and interest rate risks, the N C U A Board decided to build up the Share 00:09:14.851 --> 00:09:16.871 Insurance Fund’s liquidity position. 00:09:17.431 --> 00:09:21.021 The current overnight balance is FIVE POINT SIX billion DOLLARS. 00:09:21.561 --> 00:09:25.981 The N C U A Board continues to monitor liquidity in the Share Insurance Fund. 00:09:26.679 --> 00:09:28.899 State of the Central Liquidity Facility 00:09:29.627 --> 00:09:34.007 Inflationary pressures, elevated interest rates, and liquidity risk all 00:09:34.007 --> 00:09:38.587 underscore the importance of the N C U A ’s Central Liquidity Facility (C L F). 00:09:39.227 --> 00:09:43.037 The C L F is an important tool that acts as a shock absorber when 00:09:43.077 --> 00:09:45.107 unexpected liquidity events occur. 00:09:45.858 --> 00:09:50.018 Under the N C U A ’s regulations, federally insured credit unions with 00:09:50.018 --> 00:09:53.948 assets of TWO HUNDRED FIFTY million DOLLARS or more must establish and 00:09:53.948 --> 00:09:57.678 document access to at least one contingent federal liquidity source 00:09:57.678 --> 00:10:01.508 for emergency liquidity as part of their contingency funding plans. 00:10:02.258 --> 00:10:06.648 This federal emergency liquidity backstop can be the C L F, the Federal 00:10:06.648 --> 00:10:08.838 Reserve’s Discount Window, or both. 00:10:09.358 --> 00:10:13.058 Credit unions with less than TWO HUNDRED FIFTY MILLION DOLLARS in assets 00:10:13.288 --> 00:10:16.658 are not required to have membership with a contingent federal liquidity 00:10:16.658 --> 00:10:20.818 source; however, they must identify external sources as part of their 00:10:20.818 --> 00:10:25.008 liquidity policy or provide a written contingency funding plan that is 00:10:25.008 --> 00:10:29.648 commensurate with their complexity, risk profile, and scope of operations.7 00:10:30.397 --> 00:10:34.337 As of December thirty one, Twenty-Twenty-Three, the C L F had four 00:10:34.337 --> 00:10:38.457 hundred and seven consumer credit union members, providing twenty point two 00:10:38.457 --> 00:10:40.487 billion dollars in lending capacity. 00:10:41.037 --> 00:10:45.147 These credit unions range in asset size from less than fifty million dollars 00:10:45.147 --> 00:10:46.907 to more than ten billion dollars. 00:10:47.467 --> 00:10:51.047 The C L F helps protect approximately three hundred seventy billion 00:10:51.047 --> 00:10:52.987 dollars in credit union assets. 00:10:53.567 --> 00:10:58.227 The more members the C L F has, the more effective it is as a liquidity facility. 00:10:58.557 --> 00:11:02.767 In December twenty twenty-two, the C L F had a much greater total membership 00:11:02.767 --> 00:11:05.947 of three thousand six hundred and seventy-three consumer credit unions 00:11:05.947 --> 00:11:09.817 with a combined five hundred thirty seven billion dollars in member assets 00:11:10.077 --> 00:11:13.677 and a lending capacity of twenty seven point five billion dollars. 00:11:14.387 --> 00:11:17.887 This rapid decline in membership followed the expiration of the temporary 00:11:17.887 --> 00:11:21.977 statutory enhancements that provided greater flexibility and affordability 00:11:21.977 --> 00:11:26.267 to corporate credit unions to serve as agent members of the C L F to cover their 00:11:26.267 --> 00:11:28.667 smaller credit union members, and that: 00:11:29.483 --> 00:11:32.933 • Increased the C L F’s maximum legal borrowing authority; 00:11:33.703 --> 00:11:37.333 • Permitted access for corporate credit unions, as agent members, 00:11:37.383 --> 00:11:39.343 to borrow for their own needs; and 00:11:40.082 --> 00:11:44.132 • Gave the N C U A Board the clarity and flexibility about the loans it could 00:11:44.132 --> 00:11:48.352 approve by removing the phrase, “the Board shall not approve an application 00:11:48.352 --> 00:11:52.382 for credit the intent of which is to expand credit union portfolios.” 00:11:53.121 --> 00:11:57.401 These enhancements expired on January 1, Twenty-Twenty-Three, resulting in 00:11:57.401 --> 00:12:00.601 three thousand three hundred and twenty two credit unions with less than two 00:12:00.601 --> 00:12:05.271 hundred and fifty million dollars in assets losing access to the C L F. 00:12:05.832 --> 00:12:10.632 To address this expiration and growing liquidity risks, the N C U A Board has 00:12:10.632 --> 00:12:15.052 unanimously requested that Congress allow corporate credit unions the flexibility 00:12:15.052 --> 00:12:19.212 to purchase capital stock in the C L F for a subset of their members, to 00:12:19.212 --> 00:12:22.992 provide their smaller credit union members with access to the facility. 00:12:23.622 --> 00:12:27.022 The Congressional Budget Office has scored this and the other C L 00:12:27.022 --> 00:12:29.402 F reforms at no cost to taxpayers. 00:12:30.215 --> 00:12:34.075 N C U A ’s Efforts to Protect and Strengthen the Credit Union System 00:12:34.831 --> 00:12:39.561 In the past few months, the N C U A has taken actions to respond to cybersecurity 00:12:39.561 --> 00:12:44.581 risk; enhance consumer financial protection; support minority depository 00:12:44.581 --> 00:12:49.531 institutions; improve the credit union systems and the N C U A ’s diversity, 00:12:49.661 --> 00:12:54.431 equity, inclusion, and accessibility efforts; and has considered rulemaking 00:12:54.431 --> 00:12:56.361 activities that strengthen the system. 00:12:57.135 --> 00:12:58.595 Enhancing Cybersecurity 00:12:59.280 --> 00:13:02.630 Cybersecurity threats within the financial services industry are 00:13:02.630 --> 00:13:04.620 high and expected to remain so. 00:13:05.290 --> 00:13:08.400 To maintain vigilance against these threats, the N C U 00:13:08.400 --> 00:13:12.110 A is ensuring consistency, transparency, and accountability 00:13:12.110 --> 00:13:15.870 in its cybersecurity examination program and related activities. 00:13:16.630 --> 00:13:21.500 The N C U A ’s recently implemented cyber incident reporting rule has proven helpful 00:13:21.500 --> 00:13:23.900 to the agency and credit union industry. 00:13:24.510 --> 00:13:28.190 The final rule requires a federally insured credit union to report a 00:13:28.190 --> 00:13:32.660 substantial cyber incident to the N C U A as soon as possible but no 00:13:32.660 --> 00:13:36.600 later than seventy-two hours after the credit union reasonably believes a 00:13:36.600 --> 00:13:38.830 reportable cyber incident has occurred. 00:13:39.460 --> 00:13:43.400 In the first thirty days after the rule became effective, the N C U A 00:13:43.400 --> 00:13:47.620 received one hundred and forty-six total incident reports, exceeding all 00:13:47.620 --> 00:13:49.640 previous reporting from the prior year. 00:13:50.170 --> 00:13:53.060 As of March, twenty twenty four, the total number of incident 00:13:53.060 --> 00:13:55.080 reports is just under one thousand. 00:13:55.670 --> 00:13:59.430 The data collected has significantly improved our capacity to identify 00:13:59.430 --> 00:14:02.740 trends, vulnerabilities, and potential risks that could affect 00:14:02.740 --> 00:14:04.700 the entire sector’s cybersecurity. 00:14:05.390 --> 00:14:08.820 This, in turn, has allowed us to develop strategies to enhance 00:14:08.820 --> 00:14:10.640 cyber resilience across the board. 00:14:11.190 --> 00:14:14.740 Moreover, this information will help us to evaluate the effectiveness 00:14:14.740 --> 00:14:18.880 of current cybersecurity practices among credit unions, leading to more 00:14:18.880 --> 00:14:23.010 informed regulatory guidance and better mitigation of future cyber risks. 00:14:23.610 --> 00:14:27.140 More than 70 percent of these incident reports involve third-party 00:14:27.140 --> 00:14:30.630 providers and credit union service organizations (CUSOs). 00:14:31.355 --> 00:14:35.265 The N C U A also actively communicates with credit unions about the 00:14:35.265 --> 00:14:38.565 increased likelihood of cyberattacks resulting from geopolitical 00:14:38.565 --> 00:14:40.485 tensions and other cyber events. 00:14:41.055 --> 00:14:43.495 Credit unions of all sizes are a part of U. 00:14:44.005 --> 00:14:44.245 S. 00:14:44.645 --> 00:14:48.645 critical infrastructure and will likely remain consistent targets for certain 00:14:48.645 --> 00:14:53.015 criminals, as well as our nation’s most capable foreign adversaries, and 00:14:53.015 --> 00:14:56.555 as such, should implement appropriate controls in the technology they 00:14:56.555 --> 00:14:58.435 use to deliver member services. 00:14:59.138 --> 00:15:01.478 Maintaining Consumer Financial Protection 00:15:02.195 --> 00:15:06.405 An essential part of the N C U A ’s mission is to examine credit unions with 00:15:06.405 --> 00:15:10.725 ten billion dollars or less in assets for compliance with consumer financial 00:15:10.725 --> 00:15:12.655 protection laws and regulations. 00:15:13.235 --> 00:15:17.315 The agency’s consumer compliance efforts are integral to ensuring the credit 00:15:17.315 --> 00:15:19.605 union system remains safe and sound. 00:15:20.381 --> 00:15:24.451 In Twenty-twenty-four, the agency’s consumer financial protection supervisory 00:15:24.451 --> 00:15:29.151 priorities include overdraft programs, fair lending, and automobile lending, 00:15:29.451 --> 00:15:33.731 including assessing compliance with Truth in Lending Act requirements and reviewing 00:15:33.731 --> 00:15:38.011 credit unions’ practices related to Guaranteed Asset Protection Insurance. 00:15:38.751 --> 00:15:43.061 This year, the N C U A is also focusing on credit union compliance with 00:15:43.061 --> 00:15:47.391 the Flood Disaster Protection Act, including its disclosure requirements. 00:15:48.079 --> 00:15:52.499 In addition, the agency continues to review credit union overdraft programs 00:15:52.499 --> 00:15:54.819 and non-sufficient funds fee practices. 00:15:55.269 --> 00:15:58.719 Credit union member-owners and the public should have clear visibility 00:15:58.719 --> 00:16:03.349 into the income a credit union generates from overdraft and non-sufficient funds 00:16:03.349 --> 00:16:05.269 fees charged to its member-owners. 00:16:05.699 --> 00:16:08.279 Therefore, beginning with the Twenty-twenty-four first quarter 00:16:08.279 --> 00:16:12.689 Call Report, the N C U A required federally insured credit unions with 00:16:12.689 --> 00:16:16.889 more than 1 billion dollars in assets to disclose, separately, income from 00:16:16.919 --> 00:16:19.349 overdraft and non-sufficient funds fees. 00:16:19.929 --> 00:16:23.189 These Call Report changes will allow credit unions to benchmark 00:16:23.189 --> 00:16:26.509 their overdraft programs against other financial institutions. 00:16:27.089 --> 00:16:31.179 The N C U A ’s supervision of these services aims to create a more equitable 00:16:31.179 --> 00:16:35.489 system that supports financial stability for credit union members, improves 00:16:35.489 --> 00:16:39.889 transparency, and advances the statutory mission of credit unions to meet the 00:16:39.889 --> 00:16:44.309 credit and savings needs of their members, especially those of modest means. 00:16:45.046 --> 00:16:48.606 Furthermore, the N C U A is conducting targeted fair lending 00:16:48.606 --> 00:16:52.616 examinations at federal credit unions to assess compliance with federal 00:16:52.616 --> 00:16:54.806 fair lending laws and regulations. 00:16:55.326 --> 00:16:59.596 These reviews are critical to identifying discrimination and economic equity. 00:17:00.006 --> 00:17:03.556 In the fair lending examinations conducted in Twenty-Twenty-Three, the 00:17:03.556 --> 00:17:08.246 N C U A identified pattern or practice of discrimination violations, illegal 00:17:08.246 --> 00:17:12.406 redlining, indirect lending pricing concerns, systemic Home Mortgage 00:17:12.406 --> 00:17:16.836 Disclosure Act violations, Regulation B notification and government monitoring 00:17:16.836 --> 00:17:21.106 information violations, and numerous instances of inadequate fair lending 00:17:21.106 --> 00:17:22.806 compliance management systems. 00:17:23.386 --> 00:17:27.136 In Twenty-Twenty-Three, the N C U A referred six credit unions to the 00:17:27.136 --> 00:17:31.236 Department of Justice for discrimination based on age or marital status. 00:17:31.806 --> 00:17:36.296 These referrals impacted over fifty-five thousand consumers, and associated 00:17:36.296 --> 00:17:40.446 remediation expenses exceeded five hundred and seventy-five thousand dollars. 00:17:41.162 --> 00:17:45.232 In February, the N C U A joined the other Federal Financial Institution 00:17:45.232 --> 00:17:49.542 Examination Council agencies to issue a statement of examination principles 00:17:49.542 --> 00:17:54.032 related to valuation discrimination and bias in residential real estate lending. 00:17:54.612 --> 00:17:58.002 The principles will assess whether credit unions’ compliance and risk 00:17:58.002 --> 00:18:02.192 management practices are sufficient to identify and mitigate discrimination 00:18:02.192 --> 00:18:05.932 or bias in their residential real estate valuation practices. 00:18:06.679 --> 00:18:10.669 As part of its consumer financial protection efforts, the N C U A ’s 00:18:10.669 --> 00:18:14.359 Consumer Assistance Center resolves consumer complaints against federal 00:18:14.359 --> 00:18:18.639 credit unions with total assets of ten billion dollars or less and, in 00:18:18.639 --> 00:18:22.669 certain instances, federally insured, state-chartered credit unions. 00:18:23.089 --> 00:18:28.009 In Twenty-Twenty-Three, the Consumer Assistance Center responded to 12,276 00:18:28.039 --> 00:18:33.939 written complaints, 884 inquiries, 35,098 telephone calls, and recovered 00:18:33.939 --> 00:18:38.069 over one point one million dollars in monetary benefits for complaints from 00:18:38.069 --> 00:18:42.799 consumers and credit unions concerning consumer financial protection regulations. 00:18:43.527 --> 00:18:47.747 Finally, the N C U A regularly offers webinars promoting financial 00:18:47.747 --> 00:18:49.797 education and economic equity. 00:18:50.397 --> 00:18:54.407 Over the past year, the agency has hosted webinars on cybersecurity and 00:18:54.407 --> 00:18:59.687 identity protection, the IRS’s Volunteer Income Tax Assistance program, appraisal 00:18:59.687 --> 00:19:04.047 bias, elder financial exploitation, and closing the racial wealth gap 00:19:04.147 --> 00:19:05.827 and increasing financial equity. 00:19:06.257 --> 00:19:10.457 The N C U A also released the Money Basics Guides, a series of learning 00:19:10.457 --> 00:19:14.567 tools developed to assist financial educators, credit unions, and other 00:19:14.567 --> 00:19:18.467 financial institutions with promoting financial literacy in their communities. 00:19:19.027 --> 00:19:22.127 The guides are also designed to provide consumers with practical 00:19:22.127 --> 00:19:25.767 skills to manage their money and increase their financial capability. 00:19:26.317 --> 00:19:30.527 The series includes guides on draft and share accounts, saving and budgeting, 00:19:30.617 --> 00:19:32.277 and building and maintaining credit. 00:19:32.867 --> 00:19:37.087 Lastly, the agency participates in national financial literacy initiatives, 00:19:37.187 --> 00:19:40.907 including the interagency Financial Literacy and Education Commission. 00:19:41.623 --> 00:19:44.263 Supporting Minority Depository Institutions 00:19:44.941 --> 00:19:49.931 Minority depository institutions (M D I’s) play a crucial role in providing safe, 00:19:50.071 --> 00:19:54.501 fair and affordable financial services to people with modest means, especially 00:19:54.501 --> 00:19:58.181 minority individuals and communities that have traditionally been underserved 00:19:58.181 --> 00:20:00.011 by the financial services system. 00:20:00.651 --> 00:20:04.421 At the end of the fourth quarter of Twenty-Twenty-Three, there were 492 00:20:04.421 --> 00:20:08.371 M D I credit unions—about one in ten of all federally insured credit 00:20:08.371 --> 00:20:12.751 unions—serving more than 6.5 million members and holding assets of more 00:20:12.751 --> 00:20:14.421 than eighty eight billion dollars. 00:20:14.821 --> 00:20:19.181 Although M D I’s are typically smaller institutions, with average assets of 00:20:19.181 --> 00:20:24.211 approximately 181 million dollars, they are solid performers with a return on 00:20:24.211 --> 00:20:29.181 average assets, net worth ratio, and net interest margin comparable to or 00:20:29.181 --> 00:20:31.471 exceeding those of credit unions overall. 00:20:32.180 --> 00:20:36.090 The N C U A ’s M D I Preservation Program, in place since twenty 00:20:36.090 --> 00:20:40.340 fifteen, assists in cultivating and sustaining existing M D I’S. 00:20:40.920 --> 00:20:46.490 In 2022, the N C U A launched the Small Credit Union and M D I Support Program to 00:20:46.490 --> 00:20:51.090 help M D I’S with operational challenges such as staff training, examination 00:20:51.090 --> 00:20:53.000 concerns, and earnings improvement. 00:20:53.580 --> 00:20:57.580 For Twenty-twenty-four, the N C U A is allocating four thousand six hundred staff 00:20:57.580 --> 00:21:02.250 hours across its three regional offices to support and consult with M D I’S. 00:21:02.978 --> 00:21:07.638 In the Twenty-Twenty-Three grant round, 42 M D I’s received over 1.4 million 00:21:07.638 --> 00:21:12.288 dollars in technical assistance grants, a five-fold increase from the previous year. 00:21:12.848 --> 00:21:17.098 Earlier that year, Congress authorized all M D I’s to be eligible for 00:21:17.098 --> 00:21:20.478 Community Development Revolving Loan Fund grants and loans. 00:21:20.998 --> 00:21:24.518 Prior to Twenty-Twenty-Three, M D I’s had to meet the low-income 00:21:24.518 --> 00:21:26.738 credit union designation to qualify. 00:21:27.108 --> 00:21:31.408 This authorization was not extended in the recent appropriation, and I respectfully 00:21:31.408 --> 00:21:36.528 request that lawmakers reinstate C D R L F eligibility for all M D I’s. 00:21:37.098 --> 00:21:41.598 M D I’s are very small credit unions with average assets of 180 million 00:21:41.598 --> 00:21:46.298 dollars and, in many circumstances, are supported by unpaid volunteer staff. 00:21:46.888 --> 00:21:51.798 Due to limited resources, C D R L F grants assist M D I’S in remaining 00:21:51.798 --> 00:21:55.968 competitive by starting a new product or service such as ATMs, online 00:21:55.968 --> 00:22:00.058 banking, and other products consumers expect from a financial institution. 00:22:00.819 --> 00:22:05.659 In addition, the N C U A hosted an M D I Awareness Month in Twenty-Twenty-Three to 00:22:05.659 --> 00:22:07.879 showcase the work of these credit unions. 00:22:08.339 --> 00:22:11.009 Similar efforts will continue in Twenty-twenty-four. 00:22:11.409 --> 00:22:15.429 In October, the agency hosted an M D I Symposium that discussed 00:22:15.429 --> 00:22:19.419 how it could better serve M D I’S, and the N C U A plans to hold a 00:22:19.419 --> 00:22:21.149 similar event again this year. 00:22:21.709 --> 00:22:26.009 The N C U A intends to use information from this outreach to further improve 00:22:26.009 --> 00:22:28.229 its M D I Preservation Program. 00:22:28.995 --> 00:22:32.795 Advancing Diversity, Equity, Inclusion, and Accessibility 00:22:33.491 --> 00:22:38.071 The N C U A is fully committed to fostering diversity, equity, inclusion, 00:22:38.171 --> 00:22:42.471 and accessibility (D E I A) within the agency and the credit union system. 00:22:42.961 --> 00:22:47.011 Through external initiatives like the agency’s DEI Summit and internal efforts 00:22:47.011 --> 00:22:51.871 like employee resource groups, outreach to potential diverse suppliers, and hiring 00:22:51.871 --> 00:22:56.591 initiatives to promote a diverse pipeline of applicants, the N C U A advances 00:22:56.591 --> 00:23:01.381 important D E I A principles within the agency and across the credit union system. 00:23:01.721 --> 00:23:06.291 These efforts are outlined in the N C U A ’s Diversity, Equity, Inclusion, 00:23:06.401 --> 00:23:09.741 and Accessibility Strategic Plan Twenty-twenty-four TO TWENTY TWENTY 00:23:09.741 --> 00:23:11.741 SIX, released earlier this year. 00:23:12.381 --> 00:23:16.211 The four strategic goals in this plan will guide the N C U A ’s efforts 00:23:16.211 --> 00:23:20.221 and reinforce its commitment to D E I A as a business imperative for the 00:23:20.221 --> 00:23:22.411 agency and the credit union industry. 00:23:22.981 --> 00:23:26.641 In doing so, the agency and the broader credit union community will 00:23:26.641 --> 00:23:30.871 be well-positioned for significant, long-term, and sustainable progress. 00:23:31.606 --> 00:23:35.716 As shown in the agency’s Federal Employee Viewpoint Survey results, the 00:23:35.716 --> 00:23:39.706 N C U A draws strength from a broad range of talents and perspectives. 00:23:40.336 --> 00:23:42.386 The agency uses data from the U.S. 00:23:42.666 --> 00:23:46.116 Office of Personnel Management’s Federal Employee Viewpoint Survey, 00:23:46.466 --> 00:23:50.166 including the Diversity, Equity, Inclusion, and Accessibility 00:23:50.166 --> 00:23:54.756 Index, to inform its data-driven D E I A strategies and activities. 00:23:55.256 --> 00:24:00.516 In Twenty-Twenty-Three, the D E I A index revealed that 77 percent of N C U A 00:24:00.516 --> 00:24:05.776 respondents reported positive perceptions of agency practices related to D E I A. 00:24:06.346 --> 00:24:10.066 The government-wide D E I A index average was 72 percent 00:24:10.066 --> 00:24:14.196 and 76 percent for medium-sized agencies in Twenty-Twenty-Three. 00:24:14.894 --> 00:24:19.204 The N C U A also supports workforce diversity, equity, inclusion, 00:24:19.294 --> 00:24:22.554 and accessibility through its training, outreach and recruitment, 00:24:22.584 --> 00:24:26.764 special emphasis programs, and employee resource groups (E R G). 00:24:27.094 --> 00:24:31.244 During fiscal year Twenty-Twenty-Three, E R G’s expanded their presence in 00:24:31.244 --> 00:24:35.784 the N C U A community—41 POINT 4 percent of N C U A employees are 00:24:35.784 --> 00:24:40.444 members of E R G’s, putting the N C U A well above the industry-standard 00:24:40.484 --> 00:24:44.934 E R G membership goal of 10 percent of an organization’s total workforce. 00:24:45.657 --> 00:24:49.577 In addition, the N C U A routinely recruits employees with diverse 00:24:49.577 --> 00:24:53.397 backgrounds and seeks to ensure broad applicant pools for vacancies. 00:24:53.937 --> 00:24:57.157 These diversity recruitment efforts aim to attract and retain 00:24:57.157 --> 00:25:00.907 highly qualified individuals from historically underrepresented groups. 00:25:01.517 --> 00:25:06.217 The agency continues to build a pipeline of diverse talent in attracting, hiring, 00:25:06.297 --> 00:25:08.097 and retaining a diverse workforce. 00:25:08.387 --> 00:25:12.507 Since TWENTY SEVENTEEN, the N C U A has consistently exceeded the federal 00:25:12.507 --> 00:25:16.307 employment rate goals for employees with disabilities and employees with 00:25:16.307 --> 00:25:20.737 targeted disabilities, with 17 POINT 0 percent of individuals reporting 00:25:20.737 --> 00:25:24.897 disabilities and 4 POINT 7 percent reporting targeted disabilities. 00:25:25.635 --> 00:25:29.225 The N C U A supports accessibility through its hiring efforts, 00:25:29.415 --> 00:25:33.475 reasonable accommodations program, Disability Solutions Desk, and 00:25:33.475 --> 00:25:35.865 Section 508 compliance program. 00:25:36.455 --> 00:25:40.235 In GSA’s Twenty-Twenty-Three report to Congress on compliance with Section 00:25:40.235 --> 00:25:44.995 508 of the Rehabilitation Act of NINETEEN SEVENTY THREE, the N C U 00:25:44.995 --> 00:25:48.875 A had a maturity level of Moderate and a conformance level of Very High. 00:25:49.235 --> 00:25:52.715 In Twenty-twenty-four, training, human capital, culture, and 00:25:52.715 --> 00:25:56.505 leadership will be the agency’s focus areas for further improvement 00:25:56.555 --> 00:25:58.825 in its compliance with Section 508. 00:25:59.629 --> 00:26:03.539 The N C U A continues to build a diverse supplier network to obtain 00:26:03.539 --> 00:26:07.559 innovative solutions and the best value, particularly in technology 00:26:07.559 --> 00:26:09.689 and information technology solutions. 00:26:10.139 --> 00:26:13.889 The agency is committed to supporting minority- and women-owned businesses 00:26:13.889 --> 00:26:15.929 through our supplier diversity program. 00:26:16.489 --> 00:26:20.469 Diverse suppliers and vendors play a vital role in the economic success 00:26:20.469 --> 00:26:24.139 of small businesses and diverse communities, and in the success of 00:26:24.139 --> 00:26:28.249 the N C U A , by bringing in new perspectives and delivering innovation. 00:26:28.609 --> 00:26:33.739 By fiscal year-end Twenty-Twenty-Three, the agency awarded 47 POINT 5 percent 00:26:33.739 --> 00:26:37.589 of reportable contract dollars to minority- or women-owned businesses. 00:26:38.249 --> 00:26:42.429 This performance represents a strong, sustained showing for the N C U A and 00:26:42.429 --> 00:26:46.979 places it among the top performers among federal financial regulatory agencies. 00:26:47.683 --> 00:26:51.843 The N C U A also provides credit unions with a diversity self-assessment 00:26:51.843 --> 00:26:55.843 tool to help measure their progress in applying D E I A principles. 00:26:56.273 --> 00:27:00.123 Credit unions may assess their D E I A policies and programs through 00:27:00.123 --> 00:27:04.013 this voluntary credit union diversity self-assessment offered annually. 00:27:04.393 --> 00:27:08.443 Credit union voluntary self-assessments have no bearing on CAMELS rating and 00:27:08.443 --> 00:27:10.533 examiners cannot access the data. 00:27:11.083 --> 00:27:15.293 The N C U A reports credit union diversity data only in the aggregate. 00:27:15.803 --> 00:27:20.203 The agency encourages credit unions to use this tool to support and evaluate 00:27:20.203 --> 00:27:24.353 their D E I A efforts and benchmark themselves with peer institutions. 00:27:24.763 --> 00:27:28.203 Credit unions can use the self-assessment to establish a baseline 00:27:28.203 --> 00:27:31.993 for action, such as committing to develop new products and services 00:27:31.993 --> 00:27:35.853 to address the needs of communities of color, increasing investment in 00:27:35.853 --> 00:27:39.773 underserved areas, and improving community marketing and outreach. 00:27:40.502 --> 00:27:44.702 Finally, from July 9-11, the N C U A will host its annual 00:27:44.702 --> 00:27:48.742 Diversity, Equity, and Inclusion Summit in Minneapolis, Minnesota. 00:27:49.412 --> 00:27:52.712 This event provides a forum for hundreds of stakeholders to attend 00:27:52.712 --> 00:27:56.692 workshops, network, share best practices, and meet with leaders 00:27:56.692 --> 00:27:59.222 on ways to expand D E I A efforts. 00:27:59.904 --> 00:28:01.214 Rulemaking Activities 00:28:01.913 --> 00:28:06.543 In November, the N C U A Board unanimously approved a final rule that adds 00:28:06.603 --> 00:28:11.113 “war veterans’ organizations” to the definition of a “qualified charity” that 00:28:11.113 --> 00:28:15.133 a federal credit union may contribute to using a charitable donation account. 00:28:15.613 --> 00:28:20.523 Specifically, the final rule adds a post or organization of past or present members 00:28:20.523 --> 00:28:25.493 of the Armed Forces of the United States, or an auxiliary unit or society of, or 00:28:25.493 --> 00:28:30.213 a trust or foundation for, any such post or organization recognized as exempt 00:28:30.213 --> 00:28:35.013 from taxation under section 501(c)(19) of the Internal Revenue Code to the 00:28:35.013 --> 00:28:39.543 definition of a “qualified charity” that a federal credit union may contribute 00:28:39.543 --> 00:28:41.593 to using a charitable donation account. 00:28:42.283 --> 00:28:46.093 With this final rule, the N C U A took an important step in honoring 00:28:46.093 --> 00:28:47.593 our nation’s many veterans. 00:28:48.308 --> 00:28:52.138 In March of this year, the N C U A Board finalized updates to the 00:28:52.138 --> 00:28:55.578 Interpretive Ruling and Policy Statement that governs the agency’s 00:28:55.578 --> 00:29:00.708 Minority Depository Institution (M D I) Preservation Program for credit unions. 00:29:01.168 --> 00:29:05.698 M D I’S play an important and unique role in promoting the economic viability of 00:29:05.698 --> 00:29:07.818 minority and underserved communities. 00:29:08.338 --> 00:29:12.358 Through its M D I Preservation Program, the N C U A engages in 00:29:12.358 --> 00:29:16.168 a range of efforts to preserve M D I’S and foster their success. 00:29:16.468 --> 00:29:21.048 The M D I Preservation Program is designed to comply with section 308 00:29:21.098 --> 00:29:25.928 of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. 00:29:26.680 --> 00:29:30.540 The updates included incorporating recent program initiatives, referencing 00:29:30.540 --> 00:29:35.850 examiner guidance, explaining how the N C U A will review an M D I’s designation 00:29:35.850 --> 00:29:40.350 status during routine evaluations, and adding new subsections on engagement, 00:29:40.470 --> 00:29:45.310 technical assistance, M D I examinations, Community Development Revolving Loan 00:29:45.310 --> 00:29:50.000 Fund grants and loans, training and education, and M D I preservation. 00:29:50.290 --> 00:29:54.300 These changes to the structure and current administration of the M D I 00:29:54.300 --> 00:29:58.560 Program will better enable hundreds of M D I credit unions to meet the 00:29:58.560 --> 00:30:00.420 needs of their members and communities. 00:30:01.182 --> 00:30:05.582 In addition, the N C U A has begun plans to review credit union records 00:30:05.582 --> 00:30:09.792 preservation requirements to understand how the agency can update its records 00:30:09.792 --> 00:30:13.272 preservation program regulations and accompanying guidelines. 00:30:13.802 --> 00:30:17.822 The N C U A will also be considering a rulemaking to address succession 00:30:17.822 --> 00:30:19.712 planning in federal credit unions. 00:30:20.411 --> 00:30:21.721 Legislative Requests 00:30:22.358 --> 00:30:25.428 Certain amendments to the Federal Credit Union Act would allow 00:30:25.428 --> 00:30:29.568 the N C U A to do its job more effectively and safeguard credit union 00:30:29.568 --> 00:30:33.878 member-owners, the Share Insurance Fund, and ultimately the taxpayers 00:30:33.878 --> 00:30:35.648 who back the Share Insurance Fund. 00:30:36.388 --> 00:30:39.468 Restoration of Third-Party Vendor Examination Authority 00:30:40.185 --> 00:30:44.805 The N C U A ’s lack of third-party vendor examination authority is a regulatory 00:30:44.805 --> 00:30:46.695 blind spot that must be addressed. 00:30:47.345 --> 00:30:51.365 Unlike the federal prudential banking regulators, the N C U A lacks the 00:30:51.365 --> 00:30:55.155 authority to examine credit union third-party vendors and CUSOs. 00:30:55.715 --> 00:31:00.075 Yet, the risks associated with credit union reliance on third-party services 00:31:00.075 --> 00:31:04.605 are expanding, increasing the potential for losses to the Share Insurance Fund. 00:31:05.332 --> 00:31:08.632 The absence of third-party vendor examination authority limits 00:31:08.682 --> 00:31:12.302 the N C U A ’s ability to assess and mitigate potential risks 00:31:12.342 --> 00:31:13.972 associated with these vendors. 00:31:14.522 --> 00:31:18.162 Vendors typically decline requests or refuse to implement recommended 00:31:18.162 --> 00:31:23.312 actions, exacerbating credit unions’ exposure to operational, cybersecurity, 00:31:23.622 --> 00:31:26.732 and compliance risks that can arise from these relationships. 00:31:27.162 --> 00:31:30.702 Without the authority to supervise and enforce corrective actions and 00:31:30.702 --> 00:31:35.222 visibility into these entities, the N C U A cannot effectively protect 00:31:35.222 --> 00:31:37.302 credit unions and their member-owners. 00:31:38.037 --> 00:31:42.247 This regulatory blind spot has already had a negative impact on the industry. 00:31:42.777 --> 00:31:47.647 Between 2008 and 2015, nine CUSOs contributed to material losses to the 00:31:47.647 --> 00:31:52.707 Share Insurance Fund, causing losses in 24 credit unions, some of which failed. 00:31:53.297 --> 00:31:58.087 According to N C U A staff calculations, at least 73 credit unions incurred 00:31:58.087 --> 00:32:01.547 losses between TWO THOUSAND AND SEVEN and TWENTY-TWENTY as losses 00:32:01.547 --> 00:32:05.477 at CUSOs rolled onto credit union ledgers and led to liquidations. 00:32:06.027 --> 00:32:09.897 And, last years’ third-party core service provider disruption affecting 00:32:09.897 --> 00:32:14.327 60 credit unions illuminated the N C U A ’s challenges as it tried to 00:32:14.327 --> 00:32:18.737 mitigate issues on behalf of impacted credit unions and their member-owners. 00:32:19.503 --> 00:32:23.073 Independent entities such as the Government Accountability Office, the 00:32:23.073 --> 00:32:27.783 Financial Stability Oversight Council, and the N C U A ’s Office of Inspector 00:32:27.783 --> 00:32:32.023 General have identified this deficiency as a significant obstacle to the N 00:32:32.023 --> 00:32:36.253 C U A ’s mission to safeguard credit union members and the financial system. 00:32:36.923 --> 00:32:41.163 All of them have recommended that Congress provide the N C U A with this authority. 00:32:41.922 --> 00:32:45.972 Moreover, this lack of vendor authority also impacts the nation’s critical 00:32:46.002 --> 00:32:50.232 economic infrastructure and national security, as the interconnectedness of 00:32:50.232 --> 00:32:54.342 financial services expands with other industries and national infrastructure, 00:32:54.612 --> 00:32:57.032 making any exposure potentially perilous. 00:32:57.562 --> 00:33:01.402 Currently, one in three Americans use a credit union for basic financial 00:33:01.402 --> 00:33:05.342 services, and there are many credit unions with fields of membership that 00:33:05.342 --> 00:33:09.702 are tied to high-risk populations such as congressional staff, the U.S. 00:33:10.162 --> 00:33:13.302 military, the State Department, and members of the U.S. 00:33:13.772 --> 00:33:14.932 Intelligence Community. 00:33:15.562 --> 00:33:19.212 Many of these credit unions utilize third-party service providers to 00:33:19.212 --> 00:33:23.232 provide critical member services and a sophisticated cyberattack against a 00:33:23.232 --> 00:33:27.252 vendor can have measurable impacts on the personnel who are critical to government 00:33:27.252 --> 00:33:29.222 operations and national security. 00:33:29.892 --> 00:33:33.992 By current estimates, roughly 90 percent (or approximately ONE POINT NINE 00:33:33.992 --> 00:33:38.142 Trillion DOLLARS) of industry assets are in some way touched or managed by 00:33:38.172 --> 00:33:40.762 unregulated third-party service providers. 00:33:41.496 --> 00:33:45.286 If Congress grants the N C U A examination authority over credit 00:33:45.286 --> 00:33:49.016 union third-party vendors, risks would be considerably mitigated. 00:33:49.526 --> 00:33:53.406 Furthermore, credit unions would have access to N C U A examination 00:33:53.406 --> 00:33:56.986 summaries when conducting their own due diligence of vendors and there 00:33:56.986 --> 00:34:00.876 would be fewer requests from the N C U A to credit unions to intervene 00:34:00.876 --> 00:34:02.796 with vendors experiencing problems. 00:34:03.256 --> 00:34:07.816 If granted this authority, the N C U A would implement a risk-based examination 00:34:07.816 --> 00:34:12.516 program focusing on services that relate to safety and soundness, information 00:34:12.516 --> 00:34:17.296 security, cybersecurity, the Bank Secrecy Act and Anti-Money Laundering Act 00:34:17.296 --> 00:34:22.216 compliance, consumer financial protection, and areas posing significant financial 00:34:22.216 --> 00:34:24.166 risk for the Share Insurance Fund. 00:34:24.876 --> 00:34:27.066 Central Liquidity Facility Reforms 00:34:27.752 --> 00:34:32.272 The N C U A Board, as noted earlier, has unanimously supported a proposed 00:34:32.272 --> 00:34:36.212 statutory change that would restore the ability of corporate credit unions to 00:34:36.212 --> 00:34:40.672 serve as C L F agents on behalf of a subset of their member credit unions. 00:34:41.182 --> 00:34:45.012 In the first session of the 118th Congress, lawmakers introduced a 00:34:45.012 --> 00:34:49.852 bipartisan bill allowing corporate credit unions to buy C L F capital stock on 00:34:49.852 --> 00:34:51.832 behalf of a subset of their members. 00:34:52.252 --> 00:34:56.222 This bill enables corporate credit unions to contribute capital to provide 00:34:56.222 --> 00:35:00.462 coverage for smaller members with assets under 250 million DOLLARS. 00:35:00.912 --> 00:35:04.202 As liquidity risks within the credit union system continue to 00:35:04.202 --> 00:35:08.182 rise, prompt consideration of this bill would help protect the system 00:35:08.182 --> 00:35:09.872 from future liquidity events. 00:35:10.596 --> 00:35:14.126 Additional Flexibility for Administering the Share Insurance Fund 00:35:14.830 --> 00:35:19.020 Liquidity risks within the credit union system and rising interest rate risk 00:35:19.020 --> 00:35:21.650 highlight N C U A ’s need for flexibility. 00:35:22.280 --> 00:35:26.310 Therefore, N C U A urges Congress to amend the Federal Credit Union 00:35:26.350 --> 00:35:30.170 Act to remove limitations on the Share Insurance Fund’s equity ratio 00:35:30.170 --> 00:35:32.010 and ability to assess premiums. 00:35:32.780 --> 00:35:36.420 This would provide parity with the Federal Deposit Insurance Corporation 00:35:36.660 --> 00:35:38.390 and enable better fund management. 00:35:39.166 --> 00:35:43.506 Specifically, amendments should remove the limitations on assessing Share Insurance 00:35:43.506 --> 00:35:48.336 Fund premiums when the equity ratio of the fund is equal to or greater than 1 POINT 00:35:48.336 --> 00:35:52.896 30 percent and if the premium charged exceeds the amount necessary to restore 00:35:52.896 --> 00:35:55.446 the equity ratio to 1 POINT 30 percent. 00:35:55.976 --> 00:36:00.376 Further, a statutory change should remove the 1 POINT 5 percent ceiling for the 00:36:00.376 --> 00:36:04.606 Share Insurance Fund’s equity ratio from the current statutory definition of 00:36:04.606 --> 00:36:09.206 “normal operating level,” which limits the Board’s ability to establish a higher 00:36:09.206 --> 00:36:11.316 normal operating level for the fund. 00:36:12.021 --> 00:36:15.541 This approach would prevent credit unions from impairing their one percent 00:36:15.541 --> 00:36:20.221 contributed capital deposit or paying premiums during times of economic stress. 00:36:20.761 --> 00:36:24.691 Additionally, these amendments would enable the N C U A Board to proactively 00:36:24.691 --> 00:36:29.001 manage the Share Insurance Fund using a counter-cyclical approach, creating 00:36:29.001 --> 00:36:32.801 reserves during economic upswings and ensuring sufficient funds are 00:36:32.801 --> 00:36:35.081 available throughout economic downturns. 00:36:35.772 --> 00:36:39.742 Increase Grant Assistance for the Community Development Revolving Loan Fund 00:36:40.514 --> 00:36:44.414 Congress created the C D R L F program to stimulate economic 00:36:44.414 --> 00:36:47.854 development in low-income communities served by credit unions. 00:36:48.394 --> 00:36:53.184 Through its stewardship of the C D R L F, the N C U A makes technical assistance 00:36:53.184 --> 00:36:57.424 grants to eligible credit unions for a variety of initiatives, including, 00:36:57.614 --> 00:37:02.184 but not limited to, expanding outreach to underserved populations, improving 00:37:02.184 --> 00:37:07.214 digital services and cybersecurity, staff training, and capacity-building programs. 00:37:07.694 --> 00:37:12.284 The N C U A requests Congress increase the appropriation for this vital program. 00:37:12.834 --> 00:37:16.494 Although relatively small in size, these grants make a big difference to 00:37:16.494 --> 00:37:20.314 low-income and minority credit unions working to provide more and better 00:37:20.314 --> 00:37:22.484 services to their members and communities. 00:37:23.084 --> 00:37:28.494 The N C U A does not use appropriated funds to administer the C D R L F program. 00:37:29.199 --> 00:37:29.929 Conclusion 00:37:30.574 --> 00:37:33.664 The N C U A is prepared to manage the effects of the credit 00:37:33.664 --> 00:37:37.334 union system’s ever-changing economic and business landscape. 00:37:37.994 --> 00:37:42.204 The agency will continuously monitor credit union performance and collaborate 00:37:42.204 --> 00:37:46.454 with other federal financial institution regulators to ensure the stability and 00:37:46.454 --> 00:37:50.614 resilience of our nation’s financial services system and economy and to 00:37:50.614 --> 00:37:52.584 ensure that consumers are protected. 00:37:53.295 --> 00:37:57.045 This concludes the N C U A Chairman Todd Harper's Written Testimony 00:37:57.045 --> 00:38:00.535 Before the Senate Banking, Housing, and Urban Affairs Committee 00:38:01.246 --> 00:38:05.406 If your Credit union could use assistance with your exam, reach out to Mark Treichel 00:38:05.406 --> 00:38:08.146 on LinkedIn, or at mark Treichel dot com. 00:38:08.716 --> 00:38:11.346 This is Samantha Shares and we Thank you for listening.