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