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Federal Register / Vol. 86, No. 21 / Wednesday, February 3, 2021 / Rules and Regulations regulation, or order, or demonstrably unsafe or unsound practices.
B. NCUAs Examination and Supervisory Oversight As a member of the Federal Financial Institution Examination Council FFIEC,8 the NCUA participates with and generally has regulations and guidance consistent with the other financial regulators. Nevertheless, given its different statutory framework, the NCUAs supervision of Federal credit unions and federally insured, statechartered credit unions is different than the other agencies. With respect to safety and soundness, the Federal Credit Union Act requires the NCUA to ensure all federally insured credit unions operate safely and soundly.9 In particular, 12 U.S.C. 1786b compels the agency to act to correct unsafe or unsound conditions or practices in insured credit unions.10
Often, and necessarily, regulatory requirements are not simple prescriptions that lend themselves to right-or-wrong determinations.
Codifying in regulation all unsafe and unsound conditions and practices in explicit detail would be unfeasible, especially in light of the ever-evolving nature of financial services. Highly detailed or prescriptive regulations would also lead to unintended consequences. Regulated entities would face additional burden, less flexibility, and innovation would be stifled.
Notwithstanding these limitations, the NCUA has issued a regulation that implements the Federal Credit Union Acts requirement that federally insured credit unions operate safely and soundly. Section 741.3b of the NCUAs Rules and Regulation lists various factors the agency considers in determining whether the credit unions
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8 https www.ffiec.gov/.
9 There are 21 references to safety and soundness in the Federal Credit Union Act. See 12
U.S.C. 17575AviI, 1759d & f, 1781c2, 1782a6B, 1786b, 1786e, 1786f, 1786g, 1786k2, 1786r, 1786s, and 1790dh.
Similarly, the NCUA requires federally insured credit unions to comply with relevant consumer protection statutes and regulations.
10 Whenever, in the opinion of the Board, any insured credit union is engaging or has engaged in unsafe or unsound practices in conducting the business of such credit union, or is in an unsafe or unsound condition to continue operations as an insured credit union, or is violating or has violated an applicable law, rule, regulation, order, or any condition imposed in writing by the Board in connection with any action on any application, notice, or other request by the credit union or institution-affiliated party, or is violating or has violated any written agreement entered into with the Board, the Board shall serve upon the credit union a statement with respect to such practices or conditions or violations for the purpose of securing the correction thereof.

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financial condition and policies are both safe and sound. Regarding the continuing insurability of a credit union, Section 741.3d of the NCUAs Rules and Regulation goes on to specify that insurance of member accounts would not otherwise involve undue risk to the National Credit Union Share Insurance Fund NCUSIF. 11
The NCUA needs to be able to address safety and soundness issues through supervisory determinations that properly evaluate and weigh the relevant facts and considerations in their totality. For example, a federally insured credit union may be engaged in an inherently high-risk activity, but the credit union may mitigate the risk by holding extra capital and liquidity and adopting leading practices in managing the underlying risk. Conversely, another institution may have not adopted sufficient mitigations to offset the risk, leading to undue risk to the National Credit Union Share Insurance Fund and taxpayers.
Like the other agencies, the NCUA has instructions that set requirements for how examiners supervise institutions.12
For example, when addressing a concern in a report of examination, examiners are required to cite the highest authority related to the subject matter, and describe the root problem including the corresponding details and facts that support the examiners conclusion. Examiners can cite agency guidance when addressing some violations or unsafe or unsound conditions or practices when they involve a significant degree of judgment or interpretation in their application.
This is necessary and helpful for both regulated institutions and examiners by standardizing application of regulatory requirements that require judgment or interpretation in their application, instead of relying on the individual views of each examiner. The examiner guidance explains how the subject relates to a regulatory or statutory requirement and provides the institution with additional information on the topic.
Pursuant to agency policy, examiners may only include in the Document of 11 This provision states: Any circumstances which may be unique to the particular credit union concerned shall also be considered in arriving at the determination of whether or not an undue risk to the NCUSIF is or may be present. For purposes of this section, the term undue risk to the NCUSIF
is defined as a condition which creates a probability of loss in excess of that normally found in a credit union and which indicates a reasonably foreseeable probability of the credit union becoming insolvent because of such condition, with a resultant claim against the NCUSIF.
12 https www.ncua.gov/regulation-supervision/
manuals-guides/examiners-guide.

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Resolution DOR 13 issues that are significant enough that they would be escalated to the next level of enforcement for failure to correct the problem. These types of problems are defined as:
Unsafe or unsound practices that reasonably threaten the stability of the credit unionthat is, any action or lack of action that, if left uncorrected, may result in substantial loss or damage to the credit union or its members.
Violations of law or regulation that are systemic, recurring, or that result from willful neglect.
With that statutory and regulatory background in mind, the NCUA uses DORs to address practices that result in substantive noncompliance with laws or rules, enforcement actions, or conditions imposed in writing. The NCUAs policy is to identify deficient practices and violations in a timely manner and encourage corrective action well before deficiencies affect a credit unions financial condition or viability.
II. The Proposed Rule and Comments Received On November 5, 2020, the agencies issued a proposed rule Proposed Rule that would codify the 2018 Statement, with clarifying changes, as an appendix to proposed rule text.14 The Proposed Rule would supersede the 2018
Statement. The rule text would also provide that the amended version of the 2018 Statement is binding on each respective agency.
Clarification of the 2018 Statement The Petition expressed support for the 2018 Statement and acknowledged that it addresses many issues of concern for the Petitioners relating to the use of supervisory guidance. The Petition expressed concern, however, that the 2018 Statements reference to not basing criticisms on violations of supervisory guidance has led to confusion about whether MRAs are covered by the 2018 Statement.
Accordingly, the agencies proposed to clarify in the Proposed Rule that the term criticize includes the issuance of MRAs and other supervisory criticisms such as DORs, including those communicated through matters requiring board attention, documents of resolution, and supervisory recommendations collectively, 13 The Document of Resolution section of the NCUAs report of examination is the equivalent of Matters Requiring Immediate Attention used by the other banking agencies.
14 85 FR 70512 November 5, 2020.

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