NCUA Board Adopts Final Rules on Fidelity Bonds and Appraisals, Among Other Actions

The National Credit Union Administration Board held its July meeting today and approved final rules on fidelity bond requirements and appraisals for commercial real estate, approved a proposal for comments on a revised agency “Second Chance” policy statement regarding the hiring of credit union employees who had been convicted of low-risk legal offenses prior to seeking employment, as well a mid-session budget review and reprogramming.

Fidelity Bonds, Parts 794 and 713 of NCUA’s Rules
The final rule regarding fidelity bond requirements for natural person and corporate credit unions includes a number of changes from the proposal published in November. As noted by agency staff at the NCUA Board meeting, the filing comments received last fall raised concerns about the proposal, particularly the costs of implementing proposed changes. In reviewing the comments, the Board decided to approve amendments to address the compliance cost concerns. Under the final rule, all applications for fidelity bond coverage must be reviewed by a credit union’s board of directors for approval, and approvals must be accompanied by a board resolution. The proposal would have required the supervisory committee to review the application. One board member is required to review the purchase order and sign it and the same board member may not sign the purchase order in consecutive years. Among other provisions, the final rule will permit a credit union to cover credit union service organizations’ fidelity bonds if the credit union owns more than 50% of the CUSO, or if the CUSO was organized by the credit union to handle business transactions and is staffed by the credit union’s employees. The final rule would also provide adequate time to file fidelity bond claims in liquidations: four months for a voluntary liquidation and one year for involuntary liquidations. The Board members stressed that one of the objectives of the changes to the rule is to improve oversight of fidelity bond coverage to help address fraud losses.

Appraisal Threshold Increased for Commercial Real Estate, Approved on a 2-1 Vote with Board Member Harper Dissenting
A majority of the Board also approved an increase in the loan size threshold for requiring an appraisal for commercial real estate from $250,000 to $1 million, effective 90 days after publication in the Federal Register. The proposal had generated controversy among commercial banks and their lobbyists, largely because of a lower appraisal requirement threshold of $500,000 on certain commercial bank real estate loans. As required by the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018, certain federally related transactions involving rural real estate under $400,000 are exempt if a state appraiser is not available.

In dissenting, Board Member Todd Harper stated that the increase in the threshold for commercial real estate is “too large” and raised concerns about inconsistency with other regulators on this issue. However, Board Member Mark McWatters said that the rule does tailor requirements to risk since commercial real estate transactions not covered by the appraisal requirements are less than 1% of credit union assets. The Board Members favoring the rule also noted that prudent lending standards and requirements continue to apply, regardless of whether a credit union’s commercial real estate loans would be covered by the appraisal rule changes.

Second Chance Policy
A new policy to provide more flexility to credit unions without NCUA Board approval in hiring tellers, loan officers and others who had past, low-risk legal infractions was proposed by the Board. It will be open for comments for 60 days and is in line with current policy of the Federal Deposit Insurance Corporation. Chairman Hood commended the proposal and stated that allowing persons who had a prior indiscretion, perhaps years ago, to turn their lives around is “a good thing.” Board Member Harper agreed, adding that the policy statement would promote inclusion and regulatory relief.

Agency Budget
The agency also reviewed its budget and agreed to reprogram approximately $4.2 million resulting from unspent pay and benefit funds for 80 position vacancies at the beginning of 2019. The funds will be distributed among staff relocations, outside legal counsel to assist with rulemaking on asset securitization and subordinated debt, asset management in the agency’s southern region as well as for priorities in the capital budget. The agency approved an operating budget for 2019 of $304.4 million and 1,173 staff positions in November 2018.