Compliance Blog

Written by Bernadette Clair, Regulatory Compliance Counsel

Here are a couple of tidbits for your Monday. 

Letter to Credit Unions 12-CU-11.  Last week, NCUA released Letter 12-CU-11 providing answers to frequently asked questions about its Interest Rate Risk (IRR) regulation (12 CFR 741.3(b)(5)), effective September 30, 2012.

The rule requires certain federally insured credit unions to develop and adopt a written policy on IRR management and a program to implement that policy.  As a reminder, federally insured credit unions are subject to the requirements of the rule if:

• Your credit union’s assets exceed $50 million, as shown by your most recent Call Report filing; or
• Your credit union’s assets are equal to or greater than $10 million but do not exceed $50 million and the sum of your first mortgage loans held and investments with maturities exceeding five years is equal to or greater than 100% of your net worth at quarter end.

The FAQs address general questions about the rule, as well as questions regarding policy formation, and measuring, monitoring, and controlling interest rate risk.

For a taste of what’s included, here are a couple FAQs on the IRR policy:

"Who is responsible for the adequacy of the policy?

The Board of Directors is responsible for a credit union’s IRR policy. The policy should integrate with the credit union’s business policies and risk tolerance. The policy should be routinely reviewed and, if necessary, modified to address current financial conditions and address measurement of balance sheet risk. The policy should also delineate actions and authorities required for any exceptions to policy.

What should the policy include?

A written policy should:

• Identify parties responsible for review of the credit unions IRR exposure.
• Direct appropriate actions to ensure management identifies, measures, monitors, and controls IRR exposure.
• State the frequency with which monitoring and measurement will be reported to the board.
• Set risk limits for IRR exposure based on selected measurement. (for example GAP, NII or NEV)
• Choose tests such as interest rate shocks, that the credit union will perform using the selected measures.
• Provide for periodic review of material changes in IRR exposure and compliance with board approved policy and risk limits.
• Provide for assessment of the IRR impact of any new business activities prior to implementation.
• Provide for an annual review of policy to ensure it is commensurate with size, complexity and risk profile of the credit union.
• When appropriate, establish monitoring limits for individual portfolios, activities, and lines of business."

NCUA previously issued Letter to Credit Unions 12-CU-05 to provide an overview of the IRR regulation.  That Letter included the Examination Questionnaire that has been provided to NCUA examiners.  We blogged about this guidance on May 9th.

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Letter to Federal Credit Unions 12-FCU-04.  Also released last week, 12-FCU-04 briefly discusses NCUA’s decision at the July 24^th Board meeting to extend the current 18 percent interest rate ceiling for loans made by federal credit unions through March 10, 2014.

Of note, the decision preserves a federal credit union’s ability to charge up to 28 percent for payday alternative loans meeting the Short-Term Small Loan Program criteria.  The Short-Term Small Loan Program rate is set 1,000 basis points above the ceiling established by the NCUA Board for all other federal credit union loans.  NCUA’s Short-Term Small Loan Program rules are located at 12 CFR 701.21(c)(7)(iii).