NCUA BOARD BY A 2-1 VOTE ISSUES A FAR-REACHING REQUEST FOR COMMENTS ON CLIMATE CHANGE AND CREDIT UNION IMPACT

At last Thursday’s NCUA Board meeting, the board by a 2-1 vote approved an extensive and potentially far-reaching Request for Information – essentially a Request for Comments – on almost fifty areas of potential agency action through either regulation, supervision or both in response to the much discussed and hotly debated climate change issue.

This Request for Information (RFI) was a major win for NCUA Chairman Todd Harper who has been raising the climate change issue since his designation to carry the gavel at NCUA by President Biden in 2021.

Whether it be his desire to reflect the priorities of the administration that appointed him or his heartfelt belief that climate change is the generational issue of today, no one disputes that Chairman Harper is a full disciple of the climate agenda and is aggressively looking for ways to incorporate it into NCUA regulation and supervision.

Interestingly and even surprisingly, Republican Board Member Rodney Hood voted in favor of the climate change RFT while Republican Vice-Chairman Kyle Hauptman voted against it with a lengthy set of remarks that strongly challenged the need for climate change to become a major regulatory and supervisory area of activism for NCUA as a regulator and insurer of credit unions.

Board Member Hood stated that his decisive vote in favor of the RFI was because of a promise Chairman Harper had made to advance a regulatory proposal Hood supports on loan participations later this year.

Because his term expires in August 2023, it is yet to be seen whether Board Member Hood will still be at NCUA by fall when Chairman Harper seems to be willing to consider adding the Hood-backed loan participation rule to the agenda.

Time will tell whether Board Member Hood’s vote in favor of the climate change RFI was worth it in order to secure a vote on the loan participation rule.  It was a calculated risk on his part that he stated was worth it because he had given his word to support the RFI in return for the assurance of a future board vote on his loan participation rule.

Regardless of the board dynamic, Chairman Harper now has a major win on what he seems to be making on one of his signature issues – climate change and diversity, equity and inclusion (DEI).

The concern among many credit unions that we have heard from since the NCUA Board passed the RFI last week is that establishing a comment period puts many of the climate related issues raised in the RFI on the official agenda for potential future action.

With a second vote supporting the climate change agenda as it relates to credit union regulation and supervision, there is a widespread belief that – whatever one’s position on climate change may be – an activist regulatory and supervisory agenda in this arena will only serve to burden credit unions with minimal impact on climate itself.

That is a legitimate concern if you read the RFI.  It is potentially very far reaching as there are a large number of regulatory actions – and possible areas of overreach – that could stem from fifty questions asking for credit union comment.

Below we have capsulized the list of questions that NCUA has raised in the RFI that it hopes credit unions will respond to in writing to give them “guidance” and “clarity” about how the agency should join the climate change agenda.

Physical Risk

Climate-related events, including floods, sea level rise, hurricanes, wind, wildfires, and drought, may affect credit union operations (for example, office buildings, supply chain); commercial and residential real estate; agricultural, commercial, and industrial lending; and small business lending.

What climate-related physical risks, if any, are affecting the industry?

How might physical risks and the impact of these risks on credit unions and their members change over time?

What risk management strategies could institutions implement to prepare for or minimize the effects of physical risk?

Is there anything regulators should do to help institutions address physical risks?

What impact are physical risks expected to have on credit union members, particularly financially vulnerable populations, including lower-income communities, communities of color, Native American, and other under-resourced communities?

What steps could credit unions take to mitigate physical risks to ensure continued lending to these populations?

Transition Risk

Transition risks from climate change can come from government policy changes, including changes to zoning laws; other federal, state and local laws and regulations; technological changes; and consumer and market demand.

What climate-related transition risks are affecting or could affect credit unions in the various areas of business activities, including, but not limited to, operations, real estate lending, commercial lending, and small business lending?

What risk management strategies could credit unions implement to prepare for or minimize the effects of transition risk?

Is there anything regulators can do to help credit unions address transition risk?

What effects are transition risks expected to have on credit union members, particularly financially vulnerable populations, including lower-income communities, communities of color, Native American, and other under-resourced communities?

What steps could credit unions take to mitigate transition risks to ensure continued lending to these populations?

Operations

What adjustments should credit unions make to their operations (including relationships with supply chain and third parties, new product and service offerings, among others) in response to climate-related financial risks?

Governance

What role should a credit union’s board of directors have in the oversight and analysis of 168 financial risks due to climate change?

How can credit unions incorporate climate-related financial risks into their overall risk management and governance framework?

Do credit unions have board members, committees, or senior management functions that are responsible for climate-related financial risks?   If yes, please provide examples.

What are the top barriers/challenges for credit unions in designating board members, committees, and/or senior management functions to be responsible for climate-related financial risks?

Do credit union boards and senior management have, or are they aware of and have an understanding of, the tools and resources necessary to evaluate and address climate related financial risk?

What, if any, are other barriers for addressing climate-related financial risks?

Business Strategies

How should credit unions consider climate-related financial risks in  developing business strategies?

How do these risks impact product and service offerings?

In what ways may credit unions need to incorporate climate-related financial risks into business strategies and product and service offerings?

If you are a credit union, has your board and management assessed the impact of climate change on the credit union’s products and services? If yes, please briefly describe how you have assessed the impact of climate change on your credit union’s products and services.

What barriers or challenges do credit unions face in considering climate change in business strategies and product offerings? Does your board or senior management believe climate change is a material risk to the credit union’s business?

Do credit unions have sufficient expertise or are they aware of and have an understanding of the tools and resources necessary to address the financial risks and opportunities associated with climate change and their impact on credit union performance?

Do you think considering climate-related financial risks may put credit unions at a competitive disadvantage?

Do credit unions take steps to assess, reduce, or mitigate its climate impact?  If you are a credit union answering this question, please describe what your credit union has done. If your credit union has not taken such steps, do you plan to do so and what is your time frame? If your credit union does not plan to take such steps, please briefly describe the

reason(s) for not doing so.

What barriers exist that prevent your credit union from taking

such steps?

Risk Management

What methods can credit unions use to identify, measure, monitor,  manage, and report on their exposure to climate-related financial risks?

Please provide a brief description of the risk management process credit unions should take. If you are a credit union, please provide a link to your climate policy.

If you are a credit union and do not have a risk management process, do you plan to develop a process? What is the anticipated time frame for developing such a process? If you do not plan to develop such a process, please explain your rationale for this decision.

Credit unions typically evaluate credit risk, interest rate risk, liquidity risk, transaction risk, strategic risk, reputation risk, and compliance risk. How do climate-related financial risks impact these traditional risk areas?

To what extent should a credit union consider climate change in analyzing these and other existing risk factors?

What risk mitigation strategies can credit unions use to transfer some or all of the financial risks associated with climate change? Are these mitigation tools cost effective?

When credit unions consider climate change in analyzing existing risk factors, should they include the risk of adverse effects of climate change on financially vulnerable populations, including lower-income communities, communities of color, Native American, and other disadvantaged or under-resourced communities?

If you are a credit union, are you considering climate-related financial risks specific to financially vulnerable populations?

If your credit union does not currently consider climate change in analyzing its existing risk factors, do you anticipate doing so? How long will it take to do so? If you do not plan to do so, please briefly describe your reasons or barriers.

What are the top barriers for credit unions to consider (or that credit unions have encountered) in creating a risk management process for climate-related financial risks and/or including climate change in its analysis of existing risk factors?

Does your board or senior management not consider climate change as posing a material risk to your credit union’s business?

What types of data or products are necessary to assist credit unions in evaluating exposure to climate-related financial risks?

Do credit unions have sufficient understanding of the climate-related risk management process?

Do credit unions have sufficient understanding of how climate change affects existing risk factors? Please specify any other barriers credit unions face in assessing climate-related risk.

If your credit union is involved in the mortgage business, what tools does your credit union use to manage flood risk? What additional tools would be helpful to your credit union?

Reporting and Targets

What internal reporting systems are you aware of that would assist credit unions in evaluating climate-related financial risks? Please provide a brief description of these internal reporting systems. If provided by third parties, what are the costs of these reporting systems?

Climate-Related Opportunities

Climate change and efforts to address climate change may also present new opportunities for credit unions.

What products and services do credit unions offer in response to physical and transition risk (for example renewable energy loan products and services, such as loans for solar power generation or biodiesel development)?

What are the top drivers for offering these products and services?

Are you aware of credit unions or does your credit union finance clean energy projects such as residential or commercial energy efficiency upgrades and solar installations?

Is this financing of clean energy products just one of many services provided by the credit union or part of an overall business strategy?

If you provide clean energy products, please provide the estimated size of your clean energy portfolio and what percent it represents of your overall lending.

If no, please briefly describe any challenges for credit unions to offering this type of lending. Please also discuss the barriers to underwriting clean energy loans within under-resourced communities.

Each type of lending involves various areas of expertise such as underwriting, guidance for loan loss reserves, and/or technical assistance such as how to lend or acquire interest in climate-related and environmentally conscious loan products. What kind of support do credit unions need to expand products and services? Please describe any barriers to entry as well as the types of information or resources needed to facilitate a credit union’s ability to offer climate-related and environmentally conscious loan products.

Are there any climate-related opportunities, in addition to renewable energy, that credit unions should consider?

What regulatory changes would be necessary to encourage credit unions to develop products and services designed to capitalize on opportunities presented by the transition to clean energy and a less carbon intensive economy?

Suggestions for NCUA

The NCUA understands that managing the financial risks of climate  change is an evolving field and new to some credit unions. The NCUA is exploring several options to support credit unions in these efforts, including sharing industry best practices, providing guidance on how to manage the potential financial risks from climate change, convening workshops with the industry to discuss climate-related financial risk topics, and hosting educational seminars on how climate change may impact the financial system and individual credit unions.

What efforts would be the most beneficial to credit unions?

Should the NCUA modify its examination procedures and supervisory posture in relation to climate-related financial risk? This would be including, but not limited to, Flood Disaster Protection Act, Disaster Preparedness reviews, CAMELS ratings, and assessments of the level and direction of the various areas of risk.

Data Gathering

How can the NCUA support efforts to develop standards of classification and data reporting on climate-related financial risks?

What data could the NCUA collect to improve credit unions’ understanding of climate-related financial risks?

 

That’s a lot of questions. How should my credit union respond?

 

Yep, the questions are numerous and certainly point to a desire on the part of NCUA to use the data gained to impact, over time, both their regulatory and supervisory approach. You don’t ask that many questions without a purpose.

The full list above constitutes, as earlier stated, about fifty questions that credit unions are asked to voluntarily respond to in writing.  Again, while no credit union is required to respond to the RFI, the responses (or lack thereof) will become a part of the public record at NCUA that will almost certainly be used to make the case that the agency needs to be more aggressive in the climate change arena.

What should your credit union do?

While it could easily be stated that NCUA is a safety and soundness regulator of credit unions and not the Environmental Protection Agency, we are always in favor of providing input to your regulator when they ask for it.  However, in this case, a word of advice would be not to use this RFI as a forum for stating your political position on climate change.

If you feel climate change is the most important issue facing America today, this is not a request for your validation of that position.

If you feel climate change is over-hyped and simply a means by which the government can take over the lives of everyday Americans in the name of preventing greenhouse gases, again this is not the forum for that position.

And, if you are somewhere in the middle as are many Americans who feel protecting the environment is important but that it must be balanced with economic vitality and quality of life in order to bring progress and innovation in both areas and that climate change is a global issue that should require actions by all nations and not just the United States , this still is not the place to espouse your political thoughts.

Credit unions and NCUA are not at the forefront of the climate change political battle.  So our advice is not to put your credit union there either, regardless of your position on climate change.

This RFI, if you choose to respond, is an opportunity to deal specifically with what role, if any, you feel NCUA has as a regulator and insurer of credit unions to increase or diminish its regulatory arm citing climate change as a justification for doing so.

There is a great deal of regulatory mischief and conceivably perhaps some regulatory relief that could come from this RFI, depending upon the responses.  The action or inaction on the comments will be in the hands of the NCUA Board.  Hopefully, it will be measured and balanced.

Very few credit unions are happy to see NCUA moving in this direction, regardless of their position on climate change.  They are concerned about where it can lead when a safety and soundness regulator becomes focused on things other than safety and soundness (see Banks, Silicon Valley and Signature).

The consensus among the credit union clients we have spoken to since last week’s NCUA Board action is that they intend to focus any comments primarily on the section of questions regarding Climate Related Opportunities and Suggestions for NCUA.

In other words, rather than railing about the importance of or the overreach associated with climate change and why NCUA feels that its safety and soundness role should extend into areas that are best left to other federal agencies with expertise in environmental issues, credit unions could still respond to the RFI by making the case of what NCUA could do to facilitate such things as solar panel lending, charging station loans for businesses, water filtration systems, among others.  Or perhaps to encourage minimal or zero emission branches by exempting them from the fixed asset rule and taking those green fixed assets out of the risk-based capital rule altogether.

Or, what about this (although a safety and soundness argument could be made that this is not), giving a credit against the risk-based capital formula for loans made for electric vehicles or, again, solar panels.

These would be areas worth exploring for NCUA, although they should have safety and soundness as their determining factor and not scoring social points, that credit unions would likely embrace.  Or at least be open to.

But, again, the concerns we hear from our credit union clients center around the ways that NCUA could use this RFI to increase regulatory burden in the name of addressing climate change over which the agency – and even credit unions – have minimal impact, if any.

These could be extremely overreaching in nature and a considerable over-extension of the agency’s regulatory arm into what should be key strategic decisions made by credit unions themselves – such as mandatory zero-emission building designs or the prohibition of MBLs to any business that utilizes fossil fuels.

In all fairness, NCUA has not stated its intentions to act in these areas.  They continue to say that this is simply a mere request for comments to provide some clarity and guidance as they move forward with climate change related actions – if they do.

However, you can bet that the outcry would be loud and deserved if the agency were to go into such an area of over-regulation as some extreme climate activists would like to see all federal financial regulators move.

It is commendable that this Board has not taken such action despite the fact that some pressure might well have come their way from climate activists and even the Biden administration demanding that they do so.

But many believe the RFI is the first step to some type of significant action within the next two years of the Biden administration.  And the NCUA Board is likely to change soon to have a majority of Biden appointed members.

So, we encourage you to keep your comments focused on ways to use the climate change debate to help credit unions and their members – not to restrict or hinder them.

Back to our earlier suggestions for ways NCUA could help credit unions, their members and the green agenda at the same time.  How about solar panel lending?

This is one area where NCUA could indeed update its regulations to better empower credit unions that want to help further the green movement to do so.  That area of focus would be for NCUA to seriously consider expanding the ability of credit unions to offer home improvements, which is significantly driven today by the need for solar panel loans, for a term in excess of 20 years.

That would be a solid green NCUA move that would clear the air for a lot of credit unions who feel their efforts to offer solar panel loans are being polluted by this quite outdated term limitation.

Credit unions are often losing out on solar panel loans to banking competitors and other sources that regularly offer solar panel loans at 25 or 30 years.  The 20-year NCUA loan maturity limit puts federal credit unions at a competitive disadvantage on solar panel loans, a growing market for an industry looking for lending diversification options.

Very few consumers are going to pay more in a monthly payment for a solar panel loan than they would pay to the power company for their monthly electric bill.  With a 20-year loan maturity limit, the payments for solar panel loans are just not beneficial from a cost-benefit analysis for many consumers.

Just as many auto loans now go well beyond the 60-month term that many thought was the absolute longest term reasonable for a car loan just a decade ago, the extent and cost of home improvements in today’s marketplace makes the 20-year term limitation considerably a throw-back to the 1990s that could stand a new look in the 2020s.

The climate change discussion is a good way to raise this issue where credit unions are at a competitive disadvantage.

Sure, credit unions can offer home equity second mortgages for a longer term and the borrower can use the proceeds for solar panels.  And some do in order to try to meet member demands for solar panel loans.

But many competing lenders do not require a solar panel loan to be a home equity loan in order to get a longer term.  Therefore, credit unions often find themselves on (humor intended) the outside of the solar retro-fitted home looking in from the cold.

And they are losing a lot of loans, as well as other member business, when they cannot meet the member’s needs competitively when they decide to, or a local ordinance requires them to, add solar panels to their existing homes.

For those who believe pursuing a green agenda must always require extensive government mandates and rigid regimes that remove consumer choice and options, the NCUA rule on the term of home improvement loans is a classic example of a means to an end that can be furthered by regulatory empowerment meeting growing marketplace demand rather than overreaching requirements that replaces strategic planning with agency-imposed directives.

A 30-year term maximum term allowable at the credit union’s discretion on all home improvement loans including solar panel loans and other climate friendly enhancements or improvements, implemented with solid underwriting and case-by-case evaluation at the credit union level that would be implemented with strong policies and examiner supervision as to quality and performance of the loans, could be one of NCUA’s most far reaching contributions to this nation’s efforts to impact climate change with well-reasoned policies.

Of course, it is our view that the best approach to address these competitive disadvantages in the marketplace would be to simply extend the loan maturity limits on all home improvement loans regardless of whether any direct tie to climate change can be made.  However, absent a desire of the majority of the NCUA Board to move forward on such a regulatory change, there are other approaches that can and should be considered by the agency that would not only encourage credit unions to pursue more climate friendly loans and pursuits, but would actually empower them to do so.

For example, NCUA could take a similar approach to the solar panel loan maturity issue as it does with allowing federal credit unions to invest in what would be otherwise impermissible investments under NCUA regulations to fund employee benefits.  Federal credit unions have successfully utilized this authority for years in a safe and sound manner to fund employee benefits and executive compensation plans.

Perhaps a similar approach could be utilized by the agency that would allow credit unions, within appropriate bounds of safety and soundness and proper underwriting, to extend loan maturity limits on home improvement loans that are currently mandated by NCUA regulation if the home improvements to be performed include a climate friendly component such as the installation of solar panels or a home charging station for an electric vehicle.

Given that Board Member Hood’s vote to put out the Request for Information appears to be a quid pro quo primarily in exchange for Chairman Harper’s support to advance a loan participation rule later in the year, perhaps there is an opportunity to enhance the loan participation rule even further that would allow credit unions to participate in solar panel loans and other climate focused loans with maturity limits beyond the current 20-year maturity limit thus removing some of the competitive disadvantages while providing more capacity for additional climate friendly lending.

Clearly, there are ways to turn this RFI into a means to express opportunities for regulatory empowerment, as well as what many fear its unintended or even intended consequence may be – more restrictive regulations akin to the unfunded mandates approach often taken by Washington that many states and businesses often find themselves subjected to.

We encourage you, if you elect to respond to the RFI, to take this approach.  Or at least incorporate this into your comments should you choose to do so.

Until next time.

Dennis Dollar