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Federal Register / Vol. 86, No. 205 / Wednesday, October 27, 2021 / Rules and Regulations impose additional regulatory costs and burdens on credit unions.
The NCUA initially modeled its CAMEL rating system framework in 1987 after the FFIECs UFIRS, or CAMEL framework. Subsequently, FFIEC updated the CAMEL system to CAMELS in 1996. The NCUA continued to model subsequent amendments to its CAMEL system after the FFIECs CAMELS framework. The Boards decision to add the S component and thus adopt the CAMELS rating system further enhances the consistency of the NCUAs rating system with the UFIRS
system. The Board notes that the risk rating criteria for the S and L
components are consistent with UFIRS.
In addition, all other composite and component evaluation content and rating criteria are highly consistent with the FFIECs CAMELS rating system.
Consequently, the Board has determined that it is not necessary or beneficial to adopt UFIRS in its entirety.
Another commenter requested that the NCUA address the consistency of the examination process, stating that it has varied over the years from examiner to examiner. The commenter noted that the added criteria, which the commenter referred to as bifurcating components, could create more inconsistencies.
The NCUA has a framework in place that supports the uniform application of CAMEL. It includes annual supervisory priorities and examination scope updates, routine updates to the Examiners Guide and National Supervisory Policy Manual, a standardized examination platform and training program, regional and national quality assurance and control programs, and periodic training that address the inter-relationships between and among risk categories and the CAMEL rating implications. As with all examination systems across financial regulators, there is the need for examiner judgment to assess a particular situation; however, the Board believes that the agency has established processes that will support uniformity in the application of the CAMELS rating system.
Several commenters expressed concern that the proposal would require changes to some credit union processes and procedures. One commenter was especially concerned that recent accounting changes to Current Expected Credit Losses may make the changes related to CAMELS more problematic, given the increased volatility in income statements. Another commenter expressed concern that changing the rating system will disrupt the examination process for credit unions, especially smaller credit unions. The
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commenter stated that even though this change will not likely be a problem for larger credit unions that already maintain separate policies to address these risks, it may impact smaller credit unions that do not already maintain separate policies. Such credit unions may be required to create new policies and train staff on procedures to monitor them to comply with the proposed rule.
The commenter continued that smaller credit unions may not have reached the level of sophistication that is required by this change, thus creating a challenge for them.
The Board believes that the changes will not result in an unreasonable burden on credit unions. As the commenters noted, typically larger credit unions already have processes, procedures, and systems in place. With respect to smaller credit unions for example, those with assets less than $100 million, or 65 percent of credit unions as of June 2021, the Board believes that the changes will not impose a burden. Examiners of small credit unions will continue using the Estimated NEV Tool ENT to evaluate IRR.27 The ENT results inform the IRR
category rating which in turn, would inform the S component rating. With the exception of the examination report separately disclosing the liquidity risk in the L component and sensitivity to market risk in the S component, the Board believes that small credit unions will experience minimal, if any, changes in examination procedures. Moreover, the change is an enhancement to the NCUAs supervision. Credit unions do not need to do anything more than they are already doing to comply with the policy requirements of the IRR Rule 741.3b5.
One commenter stated that it is appropriate to implement the change in the first quarter of 2022 to allow credit unions to modify their systems. Several other commenters requested more lead time. One commenter suggested that the NCUA offer a transitional year in 2022, specifically performing examinations with the bifurcation but waiting to officially apply the S to the CAMEL
rating until 2023. The commenter believed this delay would afford the NCUA time to complete the implementation of its new MERIT
system and prepare clear internal guidance for examiners to follow along with clear guidance to the credit unions.
Several other commenters recommended that the new rating system not be effective until at least six months after publication in the Federal Register noting the additional time 27 NCUA

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would allow credit unions to adjust their reporting systems.
Credit unions and other stakeholders are aware that the Board has been working toward the new CAMELS
system. Specifically, the NCUAs Office of Inspector General issued a report recommending this change in 2015 and issued a number of updates between 2016 and 2021 regarding the agencys CAMELS implementation status.28
Accordingly, the Board has determined that its plans to have the CAMELS
system take effect on April 1, 2022, as proposed, is appropriate.
One commenter stated that the NCUA
should give credit unions the opportunity to comment should the NCUA decide to modify the rating descriptions used by the banking agencies.
The Board does not anticipate any modifications of the rating descriptions used by the other financial regulators.
Nevertheless, the Board notes that any substantive change to the CAMELS
rating systemeither through recommendations by the FFIEC or at the Boards initiativewould generally be made through public notice and comment under the Administrative Procedure Act.
One commenter provided a comment, beyond the scope of the proposal, that suggested the NCUA should establish and publish an examination policy stating that if a credit unions operations have not changed from previous years, yet the same circumstances are leading to a new finding or a downgrade of a credit unions composite rating under the new system, an automatic review will be triggered. Similarly, another commenter requested that the Board create a process to allow a credit union to appeal a component and composite CAMELS rating.
The Board notes these comments are beyond the scope of the proposal and thus it would be inappropriate to make these changes in this rulemaking. The Board believes that it is more appropriate to address these issues in the supervisory process on a case-bycase basis. Further, credit unions currently may appeal composite CAMEL
ratings of 3, 4, or 5, and component ratings that have a significant adverse effect on the nature or level of supervisory oversight.29
28 Review of NCUAs Interest Rate Risk Program, Report OIG1511, NCUA Office of Inspector Gen, Nov. 13, 2015, available at https www.ncua.gov/
files/oig/NCUA_Semiannual_Report_Congress_
March_2016.pdf.
29 12 CFR 746.103.

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