Trades Generally Support NCUA's Proposed Fidelity Bond Coverage Changes

ALEXANDRIA, Va.-Though they have some reservations, CUNA and NAFCU generally looked favorably upon amendments proposed by NCUA to the fidelity bond requirements. NCUA requested comment on a proposed rule to increase the maximum deductible permitted for fidelity bonds from $200,000 to $1,000,000; change the required coverage amounts for larger and smaller credit unions; and eliminate Blanket Bond Form 23 as irrelevant. Deductibles would continue to be based on asset size, but RegFlex credit unions would be permitted to raise their deductible as much as $1,000,000 under the proposal. NAFCU’s comment letter said that it supported this change but feels that other factors should be taken into consideration in determining the deductible, such as capitalization, net worth, and loss history. “NAFCU believes that proper consideration of these additional factors would render a clearer picture of the appropriate maximum deductible that should be allowed for an individual credit union,” it read. CUNA’s letter also supported this provision, but also offered a more simplistic alternative to determining a credit union’s deductible. “We would also support a simpler approach and that is, to base eligibility for the higher deductible on whether a credit union meeting the asset criterion is well-capitalized under prompt corrective action,” the letter stated. CUNA noted that credit unions meeting the proposed RegFlex eligibility requirement of 7% net worth and having at least $200 million in assets should also be able to qualify for a higher deductible even if not in RegFlex. CUNA also recommended waivers for credit unions that can have a higher deductible but then become ineligible. The proposal provides 30 days across the board, but CUNA recommended creating a process for credit unions to get longer than 30 days to obtain additional coverage. NAFCU agreed with NCUA that the current economic climate, along with increased fraudulent activities, warrant changes in fidelity bond coverage amounts. The proposal would change coverage to require 1% of the credit union’s assets over $500 million rounded to the nearest $100 million with a cap of $9 million. For credit unions below $4 million in assets, coverage would be the lesser of $250,000 or the institution’s total assets. “This increase would better prepare credit unions to perform in the current risk environment,” NAFCU’s letter read. “Further, when considering whether to raise bond coverage above the required amount, NAFCU believes that there are additional factors that should be evaluated. These factors include the credit union’s level of capitalization and portfolio structure, with particular emphasis being placed on consideration of the credit union’s loss history. NAFCU also notes that it is impossible to mitigate all risk out of a credit union’s balance sheet by increasing bond coverage, and a well run credit union provides for risk in a number of ways.” CUNA did not oppose the higher coverage levels but urged NCUA to allow credit unions additional compliance time or possibly to provide exemptions to “very well-run” credit unions. “In any event, particularly for the smaller credit unions, we urge NCUA to provide ample time for them to meet any new minimum coverage requirements and to monitor whether the new required coverage requirements are burdensome,” CUNA wrote. The agency also asked if additional coverage requirements should be considered. CUNA responded, “We believe this is a business judgment for every credit union and that NCUA should work with leagues, insurance companies and credit unions to develop best practices that identify activities and circumstances under which additional coverage might be warranted.” [email protected]