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Samantha: Hello, this is Samantha Shares.

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This episode covers N C U A Chairman
Todd Harper's Written Testimony Before

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the House Financial Services Committee

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The following is an audio
version of that testimony.

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This podcast is educational
and is not legal advice.

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We are sponsored by Credit Union
Exam Solutions Incorporated, whose

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team has over two hundred and
Forty years of National Credit

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Union  Administration experience.

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We assist our clients with N C
U A so they save time and money.

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If you are worried about a recent,
upcoming or in process N C U A

00:00:34.291 --> 00:00:38.621
examination, reach out to learn how they
can assist at Mark Treichel DOT COM.

00:00:39.101 --> 00:00:43.441
Also check out our other podcast called
With Flying Colors where we provide tips

00:00:43.441 --> 00:00:46.021
on how to achieve success with N C U A.

00:00:46.748 --> 00:00:47.828
And now the testimony.

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N C U A Chairman Todd  Harper's
Written Testimony Before the

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House Financial Services Committee

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Chairman McHenry, Ranking Member
Waters, and members of the committee,

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thank you for the invitation to
discuss the operations, programs, and

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initiatives of the National Credit
Union Administration (N C U A).

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In today’s testimony, I will discuss
the current state of the credit

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union system; the agency’s efforts
to maintain its safety and soundness,

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protect the consumers who use credit
unions, advance economic opportunity;

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the N C U A’s response to Hurricanes
Helene and Milton; and several of

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the N C U A’s legislative requests.

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State of the Credit Union System

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Overall, the credit union system remains
strong, although there are some warning

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signs of potential weaknesses that
the N C U A is closely monitoring.

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Namely, the agency is seeing growing
signs of weak loan performance, declining

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capital levels, rising delinquency
rates, and lower earnings across the

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system and at specific institutions.

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Credit Union System Performance

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As of June 30, 2024, federally insured
credit unions’ aggregate net worth

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ratio was 10.84 percent, an increase
of 22 basis points over the year.

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Year-over-year growth in
assets and lending continued,

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albeit at a slower pace.

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For the first time since 2008,
quarter-to-quarter asset growth was

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negative; however, the total assets of
the credit union system nearly reached 2.3

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trillion dollars, while total outstanding
loans exceeded 1.6 trillion dollars.

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Year-over-year share growth
remains positive, even after

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negative quarter-to-quarter
share growth in June 2024.

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Like negative asset growth, declining
total shares were last seen during 2008.

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The industry’s return on average assets
has slowed compared to one year earlier

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but remains sound at 0.69 percent.

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The net interest margin has also
increased to near the levels prior to

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the most recent rise in interest rates.

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Credit loss reserving expense has
increased given relatively high and

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rising loan delinquency and charge-offs.

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Consumer financial stress
continues to flow through credit

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unions’ loan performance data.

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The delinquency rate for total loans
and leases rose to 0.84 percent in the

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second quarter of 2024, nearing the
level last observed in December 2014.

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Meanwhile, the rolling 12- month
net charge-off rate climbed to 0.79

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percent, marking the highest rate
since mid- 2012, when consumers were

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recovering from the Great Recession.

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Despite the deterioration in loan
performance and earnings, net worth

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levels indicate the credit union system
generally remains resilient and liquidity

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appears to have stabilized during 2024.

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We, however, continue to see the
effects of consumer financial stress

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across the system and at specific
institutions as demonstrated in the

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industry’s overall CAMELS composite

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ratings.

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Approximately one in five federally
insured credit unions has a composite

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CAMELS code rating of 3, 4, or 5.

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Especially concerning is the increasing
number of complex credit unions with 500

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million dollars or more in assets falling
into the troubled category—CAMELS code 4

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or 5 ratings—during the second quarter.

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The number of troubled complex
credit unions, those with 500 million

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dollars or more in assets, tripled
in the second quarter of 2024 alone,

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and the amount of assets at these
institutions grew by more than fivefold.

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At the end of the second quarter, CAMELS
code 3, 4, and 5 credit unions held

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10.01 percent of the industry’s assets.

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It has been nearly a decade since
the N C U A last experienced this

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proportion of insured shares at risk.

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The decline in CAMELS ratings is a
contributing factor to the increase

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in the reserves held in the Share
Insurance Fund, which increased nearly

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14 percent from 209 million dollars
at the start of 2024 to 231.7 million

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dollars at the end of the third quarter.

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External Factors Affecting
the Credit Union System

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The current economic environment has
posed continuing challenges for some

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consumers and many credit unions.

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Although inflation has retreated,
the general price level is

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higher than a few years ago.

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Higher prices, along with
elevated interest rates, have

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strained household budgets.

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Loan performance has accordingly weakened.

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Interest rates have also started
to decrease and are expected to

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decline further in the year ahead.

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In the near term, however, the
elevated interest rate environment

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may deteriorate loan performance
further as adjustable-rate loans

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reprice at higher interest rates.

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Further, the resumption of reporting
delinquent federal student loans

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to credit bureaus will likely lower
credit scores for many borrowers.

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These loans were not reported
between September 30, 2023,

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and September 30, 2024.

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Likewise, commercial real estate
lending, particularly within the

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office sector, continues to show
signs of stress because of the

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prevalence of hybrid work environments.

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While the credit union system has modest
exposure to commercial real estate, the

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N C U A continues to monitor twenty-six
individual credit unions with material

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exposure to this type of lending.

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Share Insurance Fund Performance

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Backed by the full faith and credit of
the United States, the National Credit

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Union Share Insurance Fund provides
insurance coverage for individual accounts

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up to 250,000 dollars at federally
insured credit unions.2 As of June 30,

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2024, the Share Insurance Fund insured

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1.76 trillion dollars in shares
and deposits and 91.2 percent of

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total shares and deposits in the

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credit union system.

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In comparison, uninsured shares and
deposits equaled nearly 169.4 billion

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dollars, or 8.8 percent of total shares
and deposits, as of June 30, 2024.

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The Share Insurance Fund
continues to perform well, with

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no premiums expected at this time.

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As of June 30, 2024, the Share Insurance
Fund reported a year-to-date net income of

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154.3 million dollars, a net position
of 21.3 billion dollars, and an

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equity ratio of 1.28 percent, which is

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below the 1.33 percent normal operating
level set by the N C U A Board.3 Because

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of the stress in the credit union
system resulting from liquidity and

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interest rate risks, the N C U A has
increased the Share Insurance Fund’s

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liquidity position in recent years.

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As of June 30, 2024, the Share
Insurance Fund’s overnight investment

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balance was 5.7 billion dollars.

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The N C U A Board will continue to
closely monitor credit union and Share

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Insurance Fund performance and make
needed adjustments to further consumer

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confidence within the credit union system.

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State of the Central Liquidity Facility

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A credit union’s ability to effectively
deal with liquidity risk in all economic

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environments, especially during times of
systemic stress and reduced liquidity,

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underscores the importance of the N
C U A’s Central Liquidity Facility

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(CLF) to individual credit unions
and the broader credit union system.

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The CLF currently has 431 credit
union members of varying asset sizes,

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representing 9.3 percent of all
institutions within the credit union

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system.4 These credit unions have
access to approximately 21.7 billion

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dollars in contingent liquidity
funding from this federally backed

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source.

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Under the N C U A’s regulations,
credit unions with assets of 250

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million dollars or more are required
to have access to a contingent federal

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liquidity source—the CLF, the Federal
Reserve’s Discount Window, or both—as

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part of their contingency funding plan.

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Credit unions with less than 250 million
dollars in assets, while not required

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to have a membership with a contingent
federal liquidity source, must identify

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external sources as part of their
policies or contingency funding plans.

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In December 2022, the CLF’s temporary
statutory enhancements that facilitated

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the agent membership of corporate
credit unions—credit unions providing

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payment and other financial services
to consumer credit unions—expired.5 At

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that time 3,323 consumer credit unions
with less than 250 million dollars in

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assets, or approximately 67 percent
of all credit unions, lost access to

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approximately 27.5 billion dollars in
contingent liquidity through the CLF.

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To address this issue, the N C U A
Board has repeatedly and unanimously

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asked Congress for permanent statutory
authority to allow corporate credit

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unions and other agent members of the
CLF to purchase capital stock for a

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subset of the credit unions they serve.

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These statutory adjustments will
make the CLF a more affordable

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option for corporate credit unions
to subscribe to the CLF on behalf of

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their smaller credit union members
while also providing greater access

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to liquidity for more credit unions.

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The Congressional Budget Oice
has scored the CLF reforms

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at no cost to the taxpayer.6

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Eforts to Protect and Strengthen
the Credit Union System

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The N C U A over the last year has
worked to enhance cybersecurity, promote

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the prudent adoption of new financial
technologies, enforce consumer financial

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protection laws and regulations, support
minority depository institutions,

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advance diversity within the agency
and industry, and strengthen the

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resiliency of the credit union system.

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Enhancing Cybersecurity

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Overall, 442 credit unions with more
than 1 billion dollars in assets

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hold 77.2 percent of industry assets.

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As a result of this concentration, a
cybersecurity vulnerability at a large

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credit union may threaten the safety
and soundness of the entire system.

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Moreover, cybersecurity threats within the
interconnected financial services industry

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remain high and show no signs of abating.

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The N C U A, therefore, is fully committed
to enhancing its cybersecurity examination

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program and related activities.

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Last year, the N C U A deployed
its updated, scalable, and

00:11:09.355 --> 00:11:13.085
risk-focused Information Security
Examination (ISE) procedures.

00:11:13.625 --> 00:11:17.605
The ISE examination provides examiners
with standardized review steps to

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facilitate data collection and analysis.

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The N C U A also continues to expand
its partnerships with the Cybersecurity

00:11:24.985 --> 00:11:29.195
and Infrastructure Security Agency and
the Federal Bureau of Investigation to

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support credit unions, especially as the
number of ransomware incidents increase.

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In addition, the N C U A’s cyber incident
reporting rule that went into effect on

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September 1, 2023, requires a federally
insured credit union to report a cyber

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incident to the agency as soon as
possible but no later than 72 hours after

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the credit union reasonably believes a
reportable cyber incident has occurred.

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The N C U A uses this information
to understand potential cyber

00:11:58.233 --> 00:12:02.403
threats to the credit union system
and to provide recommendations to

00:12:03.137 --> 00:12:07.607
protect credit union and member
information.7 After one year, the

00:12:07.677 --> 00:12:11.577
N C U A has received more than
1,000 reportable cyber incidents.

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The data also shows that 7 out of
10 reportable cyber incidents are

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related to credit union vendors,
further underscoring the need for

00:12:19.827 --> 00:12:24.527
Congress to reinstate the N C U A’s
third-party vendor examination authority,

00:12:24.727 --> 00:12:26.417
which is further discussed below.

00:12:27.140 --> 00:12:31.310
The N C U A also provides credit
unions the Automated Cybersecurity

00:12:31.310 --> 00:12:33.670
Evaluation Toolbox (A C E T).

00:12:34.300 --> 00:12:37.450
This tool allows credit
unions of all asset sizes to

00:12:37.450 --> 00:12:39.270
conduct cybersecurity maturity

00:12:40.032 --> 00:12:42.092
assessments to measure their preparedness.

00:12:42.772 --> 00:12:46.512
The ACET maturity assessment is
voluntary for all credit unions.

00:12:47.219 --> 00:12:50.809
Enforcing Consumer Financial
Protection Laws and Regulations

00:12:51.523 --> 00:12:55.293
An essential part of the N C U
A’s statutory responsibilities

00:12:55.423 --> 00:12:57.243
is to examine credit unions with

00:12:58.031 --> 00:13:02.291
10 billion dollars or less in assets
for compliance with consumer financial

00:13:02.291 --> 00:13:04.251
protection laws and regulations.

00:13:04.821 --> 00:13:08.541
The agency’s consumer compliance
oversight ensures the credit union

00:13:08.541 --> 00:13:13.251
system not only protects credit union
member-owners from unfair practices or

00:13:13.251 --> 00:13:17.811
predatory products but also meets the
saving and credit needs of its members,

00:13:17.971 --> 00:13:19.801
especially those of modest means.

00:13:20.566 --> 00:13:25.336
In 2024, the agency focused its
attention on overdraft programs, fair

00:13:25.336 --> 00:13:29.176
lending, automobile lending, Truth
in Lending Act requirements, and

00:13:29.176 --> 00:13:31.386
Guaranteed Asset Protection insurance.

00:13:31.966 --> 00:13:35.616
The N C U A also prioritized
credit union compliance with the

00:13:35.616 --> 00:13:37.486
Flood Disaster Protection Act.

00:13:38.170 --> 00:13:41.610
The N C U A has also recently
increased visibility into the

00:13:41.610 --> 00:13:45.440
overdraft and non-sufficient funds
fees charged by credit unions.

00:13:45.880 --> 00:13:50.550
Beginning with the 2024 first quarter
Call Report, the N C U A has required

00:13:50.550 --> 00:13:54.620
federally insured credit unions with
more than 1 billion dollars in assets

00:13:54.620 --> 00:13:59.140
to separately disclose their income from
overdraft and non-sufficient funds fees.

00:13:59.710 --> 00:14:03.570
In addition to promoting transparency,
these Call Report changes allow

00:14:03.570 --> 00:14:07.440
credit unions to benchmark their
overdraft programs against their peers.

00:14:08.128 --> 00:14:11.958
Separate from the agency’s annual
supervisory priorities for consumer

00:14:11.958 --> 00:14:16.228
financial protection, the agency
completes fair lending examinations

00:14:16.228 --> 00:14:17.828
at selected institutions.

00:14:18.538 --> 00:14:24.808
In the N C U A’s fair lending examinations
conducted in 2023 and 2024, the agency

00:14:24.808 --> 00:14:27.238
identified some patterns or practices of:

00:14:28.058 --> 00:14:32.888
Discrimination based on age and marital
status,   Illegal race-based redlining,

00:14:33.571 --> 00:14:35.591
Indirect lending pricing concerns,

00:14:36.371 --> 00:14:38.841
Home Mortgage Disclosure Act violations,

00:14:39.517 --> 00:14:42.577
Equal Credit Opportunity Act
notification and government

00:14:42.577 --> 00:14:44.707
monitoring information violations,

00:14:45.335 --> 00:14:48.285
Servicemembers Civil
Relief Act violations, and

00:14:49.024 --> 00:14:52.894
Instances of inadequate fair lending
compliance management systems.

00:14:53.553 --> 00:14:58.013
The N C U A’s fair lending efforts aim
to create a financial system that works

00:14:58.013 --> 00:15:03.413
for all Americans, regardless of their
race, ethnicity, age, sex, orientation,

00:15:03.533 --> 00:15:06.133
marital status, religion, or disability.

00:15:06.673 --> 00:15:11.403
By working to enforce fair lending and
consumer financial protection laws, the N

00:15:11.403 --> 00:15:16.083
C U A is ensuring that the American system
of cooperative credit remains faithful to

00:15:16.083 --> 00:15:18.213
its mission of “people helping people.”

00:15:18.991 --> 00:15:23.101
In 2024, the N C U A referred
six credit unions to the U.S.

00:15:23.101 --> 00:15:27.121
Department of Justice for illegal
age discrimination, one for age

00:15:27.121 --> 00:15:31.111
and marital status discrimination,
and one for race-based redlining.

00:15:31.661 --> 00:15:36.601
These referrals have affected over 23,000
consumers, and associated remediation

00:15:36.601 --> 00:15:39.211
expenses exceeded 500,000 dollars.

00:15:39.661 --> 00:15:43.671
Separately, the U.S Department of
Justice announced in October the first

00:15:43.771 --> 00:15:48.091
ever race-based redlining settlement
against a federally insured credit union.

00:15:48.766 --> 00:15:52.686
In February of this year, the N C
U A also joined with other Federal

00:15:52.686 --> 00:15:56.786
Financial Institution Examination
Council (FFIEC) agencies to issue a

00:15:56.786 --> 00:16:00.906
statement of examination principles
related to valuation discrimination and

00:16:00.906 --> 00:16:03.216
bias in residential real estate lending.

00:16:03.796 --> 00:16:07.696
These principles assess whether credit
unions’ compliance and risk management

00:16:07.696 --> 00:16:12.196
practices are sufficient to identify
and mitigate discrimination or bias in

00:16:12.196 --> 00:16:14.436
their residential real estate valuation

00:16:15.174 --> 00:16:15.884
practices.

00:16:16.575 --> 00:16:20.785
In July, the N C U A again collaborated
with the other FFIEC agencies

00:16:20.785 --> 00:16:24.675
to issue Interagency Guidance on
Reconsiderations of Value (ROV) of

00:16:24.675 --> 00:16:26.825
residential real estate valuations.

00:16:27.305 --> 00:16:30.835
The guidance offers examples
of ROV policies and procedures

00:16:30.835 --> 00:16:32.655
that a financial institution may

00:16:33.396 --> 00:16:37.456
implement to help identify, address,
and mitigate discrimination risk.

00:16:38.211 --> 00:16:43.001
Also in July, the N C U A, the other
FFIEC agencies, and the Federal Housing

00:16:43.001 --> 00:16:47.441
Finance Agency issued the Automated
Valuation Model (AVM) final rule

00:16:47.541 --> 00:16:49.481
as required by the Dodd-Frank Wall

00:16:50.179 --> 00:16:52.739
Street Reform and Consumer Protection Act.

00:16:53.419 --> 00:16:57.629
The rule implements quality control
standards, including a non-discrimination

00:16:57.629 --> 00:17:02.689
standard, for A V M’s used by mortgage
originators and secondary market issuers.

00:17:03.371 --> 00:17:06.031
Supporting Minority
Depository Institutions

00:17:06.718 --> 00:17:11.298
Minority depository institutions
(MDIs) offer safe, fair, and affordable

00:17:11.298 --> 00:17:15.218
financial services and products to
minority individuals and communities

00:17:15.278 --> 00:17:18.628
that the financial services system
has historically underserved.

00:17:19.426 --> 00:17:24.986
At the end of the second quarter of 2024,
there were 490 MDI credit unions—more

00:17:24.986 --> 00:17:28.856
than one in ten federally insured
credit unions—collectively serving more

00:17:28.856 --> 00:17:33.816
than 6.6 million members and holding
assets of more than 90 billion dollars.

00:17:34.366 --> 00:17:39.436
MDI credit unions tend to be smaller
institutions with approximately 183

00:17:39.436 --> 00:17:41.416
million dollars in average assets.

00:17:41.886 --> 00:17:46.606
Yet, their financial performance measures,
including return on average assets, net

00:17:46.606 --> 00:17:51.136
worth ratio, and net interest margins,
are frequently comparable to and often

00:17:51.136 --> 00:17:53.216
exceed those of other credit unions.

00:17:53.890 --> 00:17:59.560
In 2022, the N C U A launched the Small
Credit Union and MDI Support Program to

00:17:59.560 --> 00:18:04.080
provide these institutions with help on a
range of operational and financial topics.

00:18:04.600 --> 00:18:10.300
For 2024, the N C U A allocated 4,600
staff hours across its three regions to

00:18:10.300 --> 00:18:12.350
support MDIs through this initiative.

00:18:13.133 --> 00:18:17.543
Further, MDI credit unions with a
low-income designation are eligible

00:18:17.543 --> 00:18:21.153
for Community Development Revolving
Loan Fund grants and loans.

00:18:21.733 --> 00:18:24.553
In the 2024 grant round, 39 MDIs

00:18:25.291 --> 00:18:29.391
received nearly 1.4 million dollars
in technical assistance grants.

00:18:30.061 --> 00:18:34.491
These grants assist MDIs in remaining
competitive by helping them expand access

00:18:34.491 --> 00:18:38.841
to fair and affordable products, offer
new and innovative financial products

00:18:38.841 --> 00:18:42.641
and services tailored to the needs of
their members and communities, build

00:18:42.641 --> 00:18:47.461
greater internal capacity, and bolster
cybersecurity systems and practices.

00:18:48.228 --> 00:18:52.778
Congress authorized all MDIs to be
eligible for Revolving Loan Fund grants

00:18:52.778 --> 00:18:55.238
and loans during the 2023 grant round.

00:18:55.778 --> 00:18:59.928
However, that authorization was not
extended in the 2024 appropriation,

00:19:00.158 --> 00:19:04.258
removing access to the Revolving
Loan Fund for nearly 100 MDIs.

00:19:04.898 --> 00:19:08.838
The N C U A accordingly requests
lawmakers reinstate eligibility

00:19:08.838 --> 00:19:10.818
for all MDI credit unions.

00:19:11.522 --> 00:19:13.252
Promoting Financial Technology

00:19:13.975 --> 00:19:17.755
The financial technology industry is
rapidly evolving with developments

00:19:17.755 --> 00:19:19.675
to enhance products and services.

00:19:20.225 --> 00:19:23.385
To address these developments
the N C U A has recently:

00:19:24.121 --> 00:19:28.641
Established a public-facing financial
technology and digital asset webpage;

00:19:29.377 --> 00:19:33.467
Updated the share insurance FAQs to
clarify that digital assets do not

00:19:33.467 --> 00:19:35.687
qualify for share insurance coverage;

00:19:36.427 --> 00:19:40.007
Established office hours to
engage credit unions and financial

00:19:40.007 --> 00:19:41.597
technology companies; and

00:19:42.357 --> 00:19:46.597
Updated the Credit Union Profile to
collect information about credit unions’

00:19:46.597 --> 00:19:48.787
use of financial technology companies.

00:19:49.499 --> 00:19:53.359
Based on data collected by the
N C U A, few credit unions use

00:19:53.359 --> 00:19:57.459
distributed ledger technology or
offer cryptocurrency services, through

00:19:57.459 --> 00:19:59.559
third-party vendors, to their members.

00:20:00.039 --> 00:20:04.489
The agency is monitoring the use of these
technologies to ensure proper governance,

00:20:04.569 --> 00:20:06.439
risk management, and compliance.

00:20:07.174 --> 00:20:10.894
Advancing Diversity, Equity,
Inclusion, and Accessibility

00:20:11.630 --> 00:20:16.060
The N C U A is committed to promoting
diversity, equity, inclusion, and

00:20:16.060 --> 00:20:19.700
accessibility (DEIA) within the
agency and the credit union system.

00:20:20.380 --> 00:20:24.030
The agency advances these principles
through external initiatives, like its

00:20:24.030 --> 00:20:29.380
annual DEI Summit, an MDI Symposium, the
statutorily mandated voluntary Credit

00:20:29.380 --> 00:20:34.070
Union Diversity Self-Assessment, and
internal efforts such as employee resource

00:20:34.070 --> 00:20:38.540
groups (ERGs), outreach to potential
suppliers, and hiring initiatives to

00:20:38.540 --> 00:20:40.720
encourage a diverse pool of applicants.

00:20:41.342 --> 00:20:45.012
The agency’s Federal Employee
Viewpoint Survey results show that

00:20:45.012 --> 00:20:48.652
the N C U A draws strength from
diverse talents and perspectives.

00:20:49.172 --> 00:20:53.622
The agency uses data from the survey,
including the DEIA index, to inform its

00:20:53.652 --> 00:20:55.792
data-driven strategies and activities.

00:20:56.152 --> 00:21:02.042
In 2024, the index revealed that 79.1
percent of N C U A respondents reported

00:21:02.042 --> 00:21:06.252
positive perceptions of agency’s
practices related to DEIA, compared

00:21:06.252 --> 00:21:08.122
with the government-wide DEIA index

00:21:08.863 --> 00:21:14.563
average of 72.8 percent and 76.2
percent for medium-sized agencies.

00:21:15.266 --> 00:21:19.896
The N C U A also supports workforce
diversity, equity, inclusion, and

00:21:19.896 --> 00:21:23.576
belonging through its training,
outreach, and recruitment; special

00:21:23.626 --> 00:21:25.536
emphasis programs; and ERGs.

00:21:25.996 --> 00:21:31.556
During fiscal year 2024, 42.5 percent
of N C U A employees were members of

00:21:31.556 --> 00:21:36.036
an ERG, putting the N C U A well above
the standard membership goal of 10

00:21:36.036 --> 00:21:38.186
percent of an organization’s workforce.

00:21:38.869 --> 00:21:43.079
The agency continues building a diverse
talent pipeline to attract, hire,

00:21:43.189 --> 00:21:45.239
and retain highly skilled employees.

00:21:45.789 --> 00:21:50.659
Since 2017, the N C U A has consistently
exceeded the federal employment goals

00:21:50.659 --> 00:21:54.519
for employees with disabilities and
employees with targeted disabilities.

00:21:55.129 --> 00:22:00.099
In fiscal year 2024, 17.7 percent
of the agency’s workforce was made

00:22:00.099 --> 00:22:04.969
up of individuals with disabilities,
and 4.4 percent of employees reported

00:22:04.969 --> 00:22:06.569
having a targeted disability.14

00:22:08.332 --> 00:22:11.922
The N C U A supports accessibility
through its hiring efforts,

00:22:12.092 --> 00:22:16.142
reasonable accommodations program,
Disability Solutions Desk, and

00:22:16.142 --> 00:22:18.822
Section 508 compliance program.

00:22:19.452 --> 00:22:24.002
In the General Services Administration’s
2023 report to Congress on compliance

00:22:24.002 --> 00:22:29.772
with Section 508 of the Rehabilitation
Act of 1973, the N C U A had a

00:22:29.772 --> 00:22:33.272
maturity level of Moderate and a
conformance level of Very High.

00:22:34.005 --> 00:22:37.905
The N C U A is also building a
diverse supplier network to obtain

00:22:37.905 --> 00:22:41.625
innovative solutions and the best
value for its contract actions,

00:22:41.705 --> 00:22:43.965
particularly in information technology.

00:22:44.415 --> 00:22:49.675
By fiscal year-end 2024, the agency
awarded 42.2 percent of reportable

00:22:49.675 --> 00:22:53.215
contract dollars to minority-owned
or women-owned businesses.

00:22:53.973 --> 00:22:58.553
To promote DEIA in the broader credit
union industry, the N C U A provides

00:22:58.553 --> 00:23:02.413
credit unions a voluntary diversity
self-assessment tool to measure

00:23:02.413 --> 00:23:04.103
their progress in applying DEIA

00:23:04.880 --> 00:23:05.600
principles.

00:23:06.280 --> 00:23:09.940
The N C U A administers the
self-assessment through a third party

00:23:09.940 --> 00:23:14.210
and receives and reports aggregate data
in its Office of Minority and Women

00:23:14.210 --> 00:23:16.430
Inclusion Annual Report to Congress.

00:23:17.118 --> 00:23:18.418
Rulemaking Activities

00:23:19.117 --> 00:23:23.937
During the last two quarters, the N C U A
has pursued several rulemaking activities.

00:23:24.437 --> 00:23:28.547
In April, for example, the N C U A
Board issued an advance notice of

00:23:28.547 --> 00:23:32.857
proposed rulemaking to improve and
update the agency’s records preservation

00:23:32.857 --> 00:23:35.017
program regulation and accompanying

00:23:35.757 --> 00:23:36.487
guidelines.

00:23:36.937 --> 00:23:42.727
In 2023, the N C U A received
feedback that aspects of Part 749 were

00:23:42.727 --> 00:23:44.787
potentially burdensome and unclear.

00:23:45.437 --> 00:23:48.597
Based on this feedback, the Board
sought input on whether there was a

00:23:48.597 --> 00:23:53.587
need to update Part 749 to ensure that
credit unions continue to properly

00:23:53.587 --> 00:23:58.587
preserve records vital to their business
operations, the N C U A’s supervisory

00:23:58.587 --> 00:24:00.517
needs, and the needs of their members.

00:24:01.229 --> 00:24:04.629
In July, the N C U A Board
approved a proposed rule on

00:24:04.629 --> 00:24:08.279
incentive-based compensation as
required by the Dodd-Frank Act.

00:24:08.819 --> 00:24:13.299
Specifically, Section 956 of the
Dodd-Frank Act requires that the

00:24:13.299 --> 00:24:16.689
appropriate federal regulators
jointly issue regulations or

00:24:16.689 --> 00:24:20.249
guidelines prohibiting incentive-based
compensation arrangements at

00:24:20.249 --> 00:24:22.209
covered financial institutions that

00:24:22.996 --> 00:24:27.296
encourage inappropriate risks by
providing excessive compensation or that

00:24:27.296 --> 00:24:29.376
could lead to material financial loss.

00:24:29.936 --> 00:24:32.956
These standards must also
require those covered financial

00:24:33.676 --> 00:24:37.256
institutions to disclose information
concerning incentive-based

00:24:37.256 --> 00:24:40.566
compensation arrangements to the
appropriate federal regulator.

00:24:41.350 --> 00:24:45.690
Also in July, the N C U A Board
approved a proposed rule requiring

00:24:45.810 --> 00:24:50.200
federally insured credit union boards
of directors to establish, and update

00:24:50.200 --> 00:24:52.400
at least annually, written succession

00:24:53.108 --> 00:24:54.658
plans for key positions.

00:24:55.218 --> 00:24:59.018
A succession plan would be required
to include a credit union’s strategy

00:24:59.018 --> 00:25:02.748
for recruiting candidates to each of
the key positions and to promote the

00:25:02.748 --> 00:25:05.118
credit union’s safe and sound operation.

00:25:05.788 --> 00:25:09.948
The revised proposed rule is based
on a 2022 proposal and includes

00:25:09.948 --> 00:25:13.638
several changes based on industry
comments and feedback received.

00:25:14.228 --> 00:25:18.178
The lack of succession planning continues
to be cited as a driving factor in

00:25:18.178 --> 00:25:22.408
credit union mergers, and the revised
proposal aims to moderate some of

00:25:22.408 --> 00:25:24.478
those factors leading to such mergers.

00:25:25.194 --> 00:25:29.204
The interagency notice of proposed
rulemaking required by the Financial Data

00:25:29.204 --> 00:25:35.404
Transparency Act of 2022 was published in
the Federal Register on August 22, 2024.

00:25:36.104 --> 00:25:40.384
This joint proposal serves to promote the
interoperability of financial regulatory

00:25:40.384 --> 00:25:44.264
data across the financial regulatory
agencies through the establishment

00:25:44.264 --> 00:25:48.344
of data standards for identifiers of
legal entities and other information

00:25:48.344 --> 00:25:50.424
collections submitted to the agencies.

00:25:50.994 --> 00:25:55.024
Once the interagency rule is
finalized, the N C U A will develop

00:25:55.024 --> 00:25:58.734
an agency-specific rule to determine
the applicability of the joint

00:25:58.734 --> 00:26:01.914
standards to the collections of
information under its purview.

00:26:02.600 --> 00:26:07.460
In September, the N C U A Board approved
a final rule to implement the Fair Hiring

00:26:07.460 --> 00:26:12.990
in Banking Act, enacted by Congress in the
2022 National Defense Authorization Act.

00:26:13.440 --> 00:26:17.210
As required by Congress, the final
rule allows people with convictions

00:26:17.210 --> 00:26:21.220
for certain minor or older offenses
to work in the credit union industry

00:26:21.350 --> 00:26:23.700
without applying for the N C U A Board’s

00:26:24.399 --> 00:26:25.049
approval.

00:26:25.589 --> 00:26:30.959
Section 205(d) of the Federal Credit Union
Act, as amended by the Fair Hiring in

00:26:30.959 --> 00:26:35.579
Banking Act, generally prohibits, except
with the prior written consent of the N C

00:26:35.579 --> 00:26:40.389
U A Board, a person who has been convicted
of or has a program entry for certain

00:26:40.389 --> 00:26:44.649
criminal offenses involving dishonesty
or breach of trust from participating

00:26:44.649 --> 00:26:46.399
in the affairs of a credit union.

00:26:47.078 --> 00:26:51.388
The final rule addresses the individuals
and types of offenses covered by Section

00:26:51.388 --> 00:26:56.548
205(d) and the N C U A’s procedures
for reviewing a consent application.

00:26:57.068 --> 00:27:01.718
This final rule also aligns the N C U
A’s regulations with those of the Federal

00:27:01.718 --> 00:27:03.838
Deposit Insurance Corporation (FDIC).

00:27:04.767 --> 00:27:09.567
Also in September, the N C U A Board
approved a final rule which simplifies the

00:27:09.567 --> 00:27:14.447
N C U A’s share insurance regulations by
establishing a “trust accounts” category

00:27:14.447 --> 00:27:19.217
to provide coverage of funds in both
revocable and irrevocable trusts deposited

00:27:19.217 --> 00:27:23.527
at federally insured credit unions in the
accounts of members or those otherwise

00:27:23.527 --> 00:27:25.637
eligible to maintain insured accounts.

00:27:26.097 --> 00:27:29.937
The rule aligns the insurance coverage
provided to federally insured credit

00:27:29.937 --> 00:27:34.477
union members’ revocable and irrevocable
trust accounts with the coverage provided

00:27:34.477 --> 00:27:38.267
to consumers who maintain the same
accounts at federally insured banks.

00:27:39.021 --> 00:27:40.591
Hurricane Recovery Eforts

00:27:41.282 --> 00:27:45.042
Given the importance of hurricane recovery
efforts to the Chairman and members of

00:27:45.042 --> 00:27:49.682
the committee, the N C U A has worked
diligently in recent weeks to respond to

00:27:49.682 --> 00:27:51.852
Hurricane Helene and Hurricane Milton.

00:27:52.302 --> 00:27:55.662
Hurricane Helene struck the
“big bend” area of the Florida

00:27:56.386 --> 00:28:01.586
Panhandle as a Category 3 hurricane on
September 26, affecting several states.

00:28:02.216 --> 00:28:06.486
Hurricane Milton followed closely
behind as a Category 3 on October 9

00:28:06.776 --> 00:28:10.796
near Siesta Key, Florida, primarily
affecting Florida and Georgia.

00:28:11.580 --> 00:28:14.550
Credit unions worked quickly
to resume services, where

00:28:14.550 --> 00:28:16.520
possible, at affected branches.

00:28:16.960 --> 00:28:22.030
Credit unions also undertook unprecedented
efforts to respond to a need for cash when

00:28:22.030 --> 00:28:26.280
the telecommunications needed to operate
credit and debit services broke down.

00:28:26.850 --> 00:28:31.660
N C U A staff additionally contacted
113 low-income designated credit

00:28:31.660 --> 00:28:35.720
unions in the worst-hit areas to
inform them on how to receive emergency

00:28:35.720 --> 00:28:39.400
grants and loans from the Community
Development Revolving Loan Fund.

00:28:39.900 --> 00:28:44.680
The N C U A also delayed its examination
and supervision activity and provided

00:28:44.680 --> 00:28:48.870
extensions for regulatory filing
deadlines so the management of affected

00:28:48.870 --> 00:28:53.260
credit unions could focus on restoring
facilities and services to their members.

00:28:53.953 --> 00:28:55.243
Legislative Requests

00:28:55.980 --> 00:28:59.530
As the current Congress draws to a
close and lawmakers prepare for a

00:28:59.530 --> 00:29:04.060
new Congress, the N C U A suggests
certain statutory changes to better

00:29:04.060 --> 00:29:07.390
enable the agency to achieve its
mission to protect the system of

00:29:07.390 --> 00:29:11.070
cooperative credit and its member-owners
through effective chartering,

00:29:11.120 --> 00:29:13.690
supervision, regulation, and insurance.

00:29:14.324 --> 00:29:16.384
Restoring Third-Party Vendor Oversight

00:29:17.202 --> 00:29:20.682
Credit unions frequently engage
third-party vendors and credit

00:29:20.682 --> 00:29:24.332
union service organizations to
improve operational efficiencies

00:29:24.332 --> 00:29:25.942
and enhance member services.

00:29:26.552 --> 00:29:30.792
The N C U A’s lack of third-party
vendor oversight remains a significant

00:29:30.792 --> 00:29:35.052
regulatory blind spot that has led to
vulnerabilities in the credit union system

00:29:35.052 --> 00:29:40.062
and obstacles to effective collaboration
amongst all financial regulatory agencies.

00:29:40.805 --> 00:29:44.735
Credit unions holding approximately
90 percent of industry assets use

00:29:44.735 --> 00:29:49.485
key services provided by unregulated
third-party service providers, posing

00:29:49.485 --> 00:29:51.645
potential risks to financial stability.

00:29:52.195 --> 00:29:56.515
Last November, a single third-party
vendor’s cybersecurity incident disrupted

00:29:56.515 --> 00:29:59.135
the daily operations of 60 credit unions.

00:29:59.685 --> 00:30:04.645
In June, a large credit union with
9.5 billion dollars in assets reported

00:30:04.645 --> 00:30:07.945
the personal information of more
than one million current and former

00:30:07.945 --> 00:30:11.495
members and employees had been
accessed during a ransomware attack.

00:30:11.935 --> 00:30:16.775
The breach initially occurred on May 23,
but the ransomware hackers did not shut

00:30:16.775 --> 00:30:21.705
down most of the credit union’s online
and mobile banking systems until June 29.

00:30:22.513 --> 00:30:26.853
These incidents highlight a significant
vulnerability to the 2.3 trillion

00:30:26.853 --> 00:30:31.063
dollar credit union industry and have
the capacity to debilitate our nation’s

00:30:31.063 --> 00:30:33.333
critical infrastructure if left unchecked.

00:30:33.863 --> 00:30:37.773
At a minimum, this lack of visibility
impacts credit union safety and

00:30:37.773 --> 00:30:39.953
soundness and the Share Insurance Fund.

00:30:40.654 --> 00:30:44.894
If Congress were to restore vendor
authority, the N C U A would implement

00:30:44.894 --> 00:30:48.764
this oversight through a risk-based
examination program focusing on

00:30:48.764 --> 00:30:52.544
services related to safety and
soundness, information security,

00:30:52.584 --> 00:30:57.114
cybersecurity, BSA/AML compliance,
consumer financial protection, and

00:30:57.114 --> 00:31:01.364
areas posing significant financial
risk for the Share Insurance Fund and

00:31:02.059 --> 00:31:03.799
national economic security.

00:31:04.379 --> 00:31:07.919
Having this oversight would reduce
N C U A’s requests to credit

00:31:07.919 --> 00:31:11.459
unions for intervention when
vendors are experiencing problems.

00:31:12.079 --> 00:31:16.749
It would also provide credit unions with
access to N C U A examination summaries

00:31:16.749 --> 00:31:18.849
to aid in their due diligence of vendors.

00:31:19.589 --> 00:31:23.179
This ability is currently available
to commercial banks, not credit

00:31:23.179 --> 00:31:26.889
unions, which places the industry
at a competitive disadvantage.

00:31:27.610 --> 00:31:31.410
Independent entities like the Government
Accountability Office, the Financial

00:31:31.410 --> 00:31:36.030
Stability Oversight Council, and the
N C U A’s Oice of Inspector General

00:31:36.030 --> 00:31:40.190
have all identified this deficiency
as a significant obstacle to the N

00:31:40.190 --> 00:31:42.560
C U A’s financial stability mission.

00:31:43.227 --> 00:31:45.507
Reforming the Central Liquidity Facility

00:31:46.229 --> 00:31:51.059
As discussed earlier in this testimony,
the N C U A Board unanimously supports

00:31:51.059 --> 00:31:55.549
a proposed statutory amendment to allow
corporate credit unions to serve as CLF

00:31:55.579 --> 00:31:57.529
agents for their member credit unions.

00:31:58.059 --> 00:32:02.149
A bipartisan bill introduced in the
first session of the 118th Congress

00:32:02.409 --> 00:32:06.269
would enable corporate credit unions
to purchase CLF capital stock on

00:32:06.269 --> 00:32:08.249
behalf of a subset of their members.

00:32:08.539 --> 00:32:11.909
Specifically, the legislation
would allow corporate credit unions

00:32:11.909 --> 00:32:15.239
to contribute capital to provide
coverage for smaller members with

00:32:15.239 --> 00:32:17.879
assets under 250 million dollars.

00:32:18.489 --> 00:32:22.359
Enacting this legislation would help
insulate the credit union system from

00:32:22.359 --> 00:32:26.719
future liquidity events, like those
that occurred in the first half of 2023.

00:32:27.479 --> 00:32:30.959
Providing Flexibility for
Administering the Share Insurance Fund

00:32:31.687 --> 00:32:36.067
The N C U A further urges Congress to
amend the Federal Credit Union Act to

00:32:36.067 --> 00:32:40.067
eliminate restrictions on the Share
Insurance Fund’s equity ratio and on

00:32:40.067 --> 00:32:42.327
the agency’s ability to levy premiums.

00:32:42.697 --> 00:32:46.587
Such changes would improve fund
management and align the N C U A’s

00:32:46.587 --> 00:32:50.347
authority to manage the Share Insurance
Fund with the FDIC’s authority in

00:32:50.347 --> 00:32:52.797
maintaining its Deposit Insurance Fund.

00:32:53.494 --> 00:32:57.604
Specifically, proposed changes should
remove the restrictions on levying Share

00:32:57.604 --> 00:33:02.094
Insurance Fund premiums when the fund’s
equity ratio is equal to or greater

00:33:02.094 --> 00:33:06.774
than 1.30 percent and when the premium
charged exceeds the amount needed to

00:33:06.774 --> 00:33:09.894
restore the equity ratio to 1.30 percent.

00:33:10.364 --> 00:33:14.704
A statutory change should also
eliminate the 1.50 percent ceiling

00:33:14.704 --> 00:33:18.584
from the current statutory definition
of the “normal operating level” for

00:33:18.584 --> 00:33:22.564
the Share Insurance Fund, which limits
the Board’s ability to increase the

00:33:22.564 --> 00:33:24.524
size of the fund above this level.

00:33:25.206 --> 00:33:29.446
Together, these amendments would bring
the N C U A’s statutory authority over

00:33:29.446 --> 00:33:33.606
the Share Insurance Fund more in line
with the FDIC’s authority as it relates to

00:33:33.606 --> 00:33:35.866
administering the Deposit Insurance Fund.

00:33:36.496 --> 00:33:40.406
These amendments would also better
enable the N C U A Board to proactively

00:33:40.406 --> 00:33:44.096
manage the Share Insurance Fund by
building reserves during economic

00:33:44.136 --> 00:33:48.436
upturns so that sufficient money is
available during economic downturns.

00:33:48.926 --> 00:33:52.586
A more counter- cyclical approach would
better ensure that credit unions will

00:33:52.586 --> 00:33:56.526
not need to impair their one percent
contributed capital deposit or pay

00:33:56.526 --> 00:34:00.316
premiums during times of economic
stress, when they can least afford it.

00:34:01.125 --> 00:34:05.065
Increase Grant Assistance for the
Community Development Revolving Loan Fund

00:34:05.837 --> 00:34:09.277
Grants and loans from the Community
Development Revolving Loan Fund

00:34:09.277 --> 00:34:12.577
give eligible credit unions
resources to improve service to

00:34:12.577 --> 00:34:16.097
their members and stimulate economic
development in their communities.

00:34:16.557 --> 00:34:21.017
Through its stewardship of the Revolving
Loan Fund, the N C U A provides funds

00:34:21.017 --> 00:34:24.657
to these credit unions for various
initiatives approved by the agency’s

00:34:24.657 --> 00:34:29.317
Board, including expanding outreach
to underserved populations, improving

00:34:29.317 --> 00:34:33.567
digital services and cybersecurity,
enhancing staff training, and

00:34:33.567 --> 00:34:35.897
facilitating capacity-building efforts.

00:34:36.540 --> 00:34:40.610
Maintaining a long-running trend,
the N C U A’s ability to fulfill

00:34:40.610 --> 00:34:44.440
grant requests continued to be
surpassed in the 2024 grant round.

00:34:45.050 --> 00:34:49.960
The agency received 271 applications
requesting more than 8.3 million

00:34:49.960 --> 00:34:54.010
dollars but was only able to
fund about 3.5 million dollars

00:34:54.010 --> 00:34:56.730
in grants to 135 credit unions.

00:34:57.300 --> 00:35:01.130
The N C U A, therefore, requests
Congress increase the Revolving

00:35:01.130 --> 00:35:04.250
Loan Fund appropriation to 10
million dollars to keep up with

00:35:04.250 --> 00:35:05.870
the growing demand for requests.

00:35:06.220 --> 00:35:10.140
The Revolving Loan Fund has a long
and successful track record as an

00:35:10.140 --> 00:35:14.340
effective way to provide essential
resources to low-income credit unions.

00:35:15.092 --> 00:35:15.822
Conclusion

00:35:16.477 --> 00:35:20.737
In sum, the N C U A will continue
to oversee credit union performance

00:35:20.737 --> 00:35:24.407
and coordinate with other federal
financial institution regulators, as

00:35:24.407 --> 00:35:28.607
appropriate, to ensure the overall
resiliency and stability of our nation’s

00:35:28.607 --> 00:35:30.867
financial services system and economy.

00:35:31.437 --> 00:35:34.547
Congress can further these efforts
by adopting the legislative

00:35:34.547 --> 00:35:36.097
changes suggested above.

00:35:36.804 --> 00:35:39.214
Thank you again for the
invitation to testify.

00:35:39.754 --> 00:35:42.314
I look forward to working with
the committee to safeguard and

00:35:42.314 --> 00:35:44.134
strengthen the credit union system.

00:35:44.854 --> 00:35:46.334
This concludes the testimony

00:35:47.038 --> 00:35:51.178
If your Credit union could use assistance
with your exam, reach out to Mark Treichel

00:35:51.178 --> 00:35:53.958
on LinkedIn, or at mark Treichel dot com.

00:35:54.518 --> 00:35:57.158
This is Samantha Shares and
we Thank you for listening.