Private Deposit Insurance: Credit Unions Largely Complied with Disclosure Rules, but Rules Should Be Clarified
Released: 2017-03-29T00:00:00

Letter

Background

Credit unions can be federally or state-chartered, which determines their primary regulator for safety and soundness and also their options for deposit insurance. Federally chartered credit unions are regulated by NCUA and must be federally insured by the National Credit Union Share Insurance Fund, which is administered by NCUA and provides up to $250,000 of insurance per depositor for each account ownership type. State-chartered credit unions are usually regulated by credit union supervisors in their respective state. These credit unions can be federally insured (and thus also supervised) by NCUA or, in some states, can choose to be privately insured. As of February 2017, ASI was the only company providing private primary deposit insurance. ASI provides up to $250,000 of insurance per account (rather than per depositor for each ownership type, as with NCUA). Deposit insurance covers deposit products such as checking and savings accounts, money market deposit accounts, and certificates of deposit. It does not cover other financial products, such as investments in stocks, bonds, or mutual funds.

Overview of Credit Union and Deposit Insurance Markets

The vast majority of credit unions are federally insured. As seen in figure 1, in 2015, there were more than 6,000 federally insured credit unions with more than $1 trillion in insured deposits, and 125 privately insured credit unions with $13 billion in insured deposits.

The mix of asset sizes is largely similar for federally and privately insured credit unions, and the majority of both have assets of less than $100 million. Between 2011 and 2015, the number of federally and privately insured credit unions declined by about 15 percent, due largely to mergers and liquidations. Some credit unions chose to convert between private and federal deposit insurance and appendix II contains information about the reasons that some credit unions switch insurers.

American Share Insurance

ASI is a private, not-for-profit company, headquartered in Ohio. The company is governed by Ohio law and licensed by the Ohio Department of Insurance, and its primary regulators are the Ohio Departments of Insurance and Commerce, although regulators in the other eight states in which ASI operates also have an oversight role. ASI has provided deposit insurance since 1974 and the company is owned by the credit unions for which it provides deposit insurance. The company does not normally charge premiums, which are common in the insurance industry, but instead requires its credit unions to maintain a capital contribution with the company, adjusted annually, equal to a rate of 1.3 percent of the credit union’s total insured deposits. In addition, ASI has the authority to charge special premium assessments under certain conditions with regulator approval, as it did in 2009–2013.

ASI is overseen by a board of directors that is made up of six chief executives from the credit unions it insures, as well as one ASI management representative. Quarterly, according to ASI management, ASI’s board of directors meets to review and monitor the company’s financial statements, investment activities, risk management practices, information technology issues, and sales and marketing activities. An independent auditor annually audits and renders an opinion on ASI’s consolidated financial statements prepared in accordance with generally accepted accounting principles. Additionally, ASI retains an independent actuarial firm to conduct a capital adequacy study (at least every 3 years), annually review and help estimate loss reserves, and render an annual actuarial opinion on the adequacy of its loss reserves.

Federal Law and Regulation I

Federal law requires that any depository institution that does not have federal deposit insurance clearly and conspicuously disclose that the institution is not federally insured. CFPB and the Federal Trade Commission (FTC) are the federal entities responsible for enforcing these requirements. In December 2011, CFPB issued an interim final rule restating the implementing regulation, which had been promulgated by FTC. This regulation, known as Regulation I, contains the disclosure requirements for credit unions that do not have federal deposit insurance. CFPB published a final rule in April 2016, which adopted its 2011 interim final rule without changes.

Regulation I requires disclosure that an institution does not have federal deposit insurance (1) at locations where deposits are normally received (stations or windows) except enumerated exceptions, (2) on the institution’s main Internet page (website), (3) in all advertising except enumerated exceptions, and (4) in periodic statements and account records. Regulation I generally requires depository institutions to obtain a written acknowledgment from depositors that the institution does not have federal deposit insurance.

FAST Act and Federal Home Loan Bank System

The FAST Act amended the Federal Home Loan Bank Act to permit privately insured credit unions to apply for membership in a Federal Home Loan Bank (FHLBank) and, if approved, obtain the benefits of membership, including access to loans (known as advances). The FHLBank System is a government-sponsored enterprise, composed of 11 regional banks. Federally insured credit unions have been allowed to apply for membership since 1989; other members of the FHLBank System include commercial banks, thrifts, and insurance companies. The FHLBank of Cincinnati approved ASI as a member in June 2011.

The Federal Housing Finance Agency (FHFA) regulates the FHLBanks and issued a proposed rule in September 2016 to implement provisions of the FAST Act. By law, certain types of prospective FHLBank members must have at least 10 percent of their assets in residential mortgage loans to be eligible. As of December 31, 2015, FHFA estimated that 78 of the 125 privately insured credit unions met this eligibility criterion. As of December 31, 2016, the FHLBanks had approved 16 privately insured credit unions for membership.

Regulatory and Other Assessments Indicate ASI Has Had Adequate Reserves and Strong Claims- Paying Ability

Regulators Have Not Cited Concerns about ASI

The Ohio Department of Insurance’s most recent examination of ASI, which covered 2008–2012, did not identify any deficiencies in ASI’s financial condition and determined that ASI’s reserves for losses were consistent with Ohio’s legal requirements and were adequate and appropriate. According to Ohio Department of Insurance staff, the department has not identified any issues and was not aware of any problems with ASI’s loss reserves in at least the past 10 years. They noted that ASI is classified as a nonpriority insurer by the department, which means that the company is considered low-risk and does not require enhanced oversight. This determination was based on factors such as ASI’s Insurance Regulatory Information System (IRIS) ratios and management competency. As a result of this classification, the department conducts full-scope examinations of ASI every 5 years, rather than annually or every 3 years as conducted for insurers deemed riskier.

Ohio Department of Insurance staff told us that as part of their full-scope examinations every 5 years, the examination team reviews ASI’s audited financial statements, analyzes estimates for loss reserves, and evaluates any risks to the company by reviewing legal issues, corporate governance, and management. In particular, the department’s actuary performs an analysis of ASI’s information to derive the department’s own estimate for ASI’s loss reserves. The department compares its derived estimate to ASI’s held reserves, as well as to the range of estimates reported by ASI’s third-party actuarial firm. Staff said that if the department were to identify significant differences in the estimates, it would request additional information from ASI to understand the reasons for the differences. Additionally, the department uses the IRIS ratios to aid in evaluation of the adequacy of ASI’s loss reserves. According to representatives from the National Association of Insurance Commissioners (NAIC), the procedures the department uses for assessing ASI’s capital, including its loss reserves estimates, are consistent with NAIC’s guidelines for conducting such assessments.

Ohio Department of Insurance staff also told us that on an annual basis they review the statement of actuarial opinion of ASI’s loss reserve estimates (as rendered by the third-party actuarial firm and discussed later in this report) and ASI’s audited financial statements, and also compute financial ratios. According to the staff, as part of this review, analysts review ASI’s capital position and monitor ASI’s asset quality to ensure they did not deteriorate significantly in a given period. Under Ohio law, ASI is required to maintain at least $5 million in capital, and as of December 31, 2015, ASI’s capital was roughly $219 million. In addition, Ohio Department of Insurance staff said they consider any risks that could affect ASI’s financial condition. For example, they said they evaluate risk in terms of growth, underwriting, how the company invested its assets, and any legal concerns. In addition, the department analyzes the risk-based capital ratio. They also said that a company’s risk-based capital ratio must be at least 200 percent of its calculated authorized control level risk-based capital. From 2009 through 2015, according to examination records from the Ohio Department of Insurance, ASI’s risk- based capital ratio was well above this standard. Ohio Department of Insurance staff told us that ASI management is very transparent about disclosing risk that new credit unions may pose to the company. The staff said that they engage in quarterly discussions with ASI management about the company’s quarterly financial statements and the credit unions for which ASI is considering providing deposit insurance coverage.

Ohio Department of Insurance staff said that their concern with ASI, as with any insurer, generally has been the risk posed by macroeconomic issues. For example, they stated fluctuations in the economy could pose significant concerns for insurers such as ASI. Therefore, a decline in the economy could have a significant (negative) impact on a company like ASI. The staff further noted that while the frequency of claims for losses for ASI would be low, the severity of such losses could potentially be high, which could pose a risk to the company. According to ASI management, roughly 2 percent of its privately insured credit unions failed during or since the 2007–2009 financial crisis (as compared to roughly 2 percent of federally insured credit unions, according to NCUA). In 2009, ASI reported that almost all of its loss expense was related to just two of its insured credit unions, both in Nevada. One of these credit unions merged with another. The second troubled credit union had approximately $1 billion in total assets when it received assistance from ASI. Department staff told us that during and just after the financial crisis, they monitored ASI more frequently and met monthly with ASI management to discuss the company’s exposures and potential losses, but the department never determined there was a need to conduct an additional full-scope examination.

In addition to the Ohio Department of Insurance’s oversight, the Ohio Department of Commerce annually performs a risk-based safety and soundness examination of ASI in collaboration with the eight other state credit union supervisors that regulate privately insured credit unions. However, the Ohio Department of Commerce could not share with us the results of these examinations because, as interpreted by the department, it is prohibited by law from providing details about its examination findings to third parties other than those specified in the regulations. According to Ohio Department of Commerce staff, their annual safety and soundness examination of ASI focuses on risk areas similar to those reviewed during the examination of a credit union. As a part of this process, the Ohio Department of Commerce reviews ASI’s audited financial statements, statement of actuarial opinion, and reports from ASI’s internal system used to monitor insured credit unions. Ohio Department of Commerce staff told us that on a quarterly basis, examiners review quarterly financial statements and monitor any troubled credit unions that ASI insures.

As well as participating in the Ohio Department of Commerce’s annual examination of ASI, the eight other state credit union supervisors told us that they monitor ASI’s financial condition on an annual or quarterly basis. This process generally involves a review of ASI’s annual audited or quarterly unaudited financial statements and its actuarial reports. None of the eight state supervisors with whom we spoke raised concerns about ASI’s financial condition at the time of our review. But one state credit union supervisor expressed concern that during volatile economic times, ASI might not be able to cover losses once it had exhausted its capital because ASI is not backed by the full faith and credit of the U.S. government and has no access to state guaranty funds. According to the National Conference of Insurance Guaranty Funds—whose funds provide protection for various property and casualty lines of insurance written by its member insurers––private deposit insurers are not covered. Additionally, representatives from the state credit union supervisors also told us that none of the states in which ASI operates, including Ohio, had a state guaranty fund to assist in covering losses or credit union member deposits if ASI ran into financial difficulties. However, in the event of potential impairment of ASI’s funding, Ohio law allows ASI to charge a special assessment, with regulator approval, against the credit unions it insures.

Moreover, FHFA reviews information about ASI as part of its oversight of the FHLBanks. As noted earlier, ASI is a member of the FHLBank of Cincinnati and bank representatives told us that they monitor ASI’s financial condition by reviewing ASI’s annual audited financial statements, statutory quarterly financial filings, and reports on ASI’s loss reserves. FHLBanks protect against credit risk on advances by requiring members to pledge collateral. Representatives from the FHLBank of Cincinnati told us ASI, like all FHLBank members (including privately insured credit unions), must pledge collateral to receive advances. According to FHFA staff, while FHFA may review ASI information as part of its supervision of FHLBanks, FHFA has no supervisory authority over ASI and no plans to independently assess the company’s financial condition. The FAST Act does require ASI to provide FHFA a copy of its annual audit. The audit must be conducted by an independent auditor and must include an assessment by the auditor that ASI follows generally accepted accounting principles and has set aside sufficient reserves for losses. This FAST Act requirement allows FHFA to review the independent auditor’s opinion to confirm that ASI has met these requirements. FHFA staff told us FHFA planned to use the ASI audited financial statements to prepare for its next annual examination of the FHLBank of Cincinnati.

ASI has several processes in place to mitigate risk and help prevent and control losses to the company. ASI management told us that applicant credit unions undergo an insurability assessment that includes a review of the credit union’s financial data, corporate governance, and CAMEL rating, and an evaluation of its operating policies and procedures. Additionally, the company continuously monitors the financial condition of the credit unions the company insures. ASI management said that quarterly they compare their credit unions against federally insured credit unions in terms of capital adequacy, earnings, and liquidity. The company conducts an examination of about 70 percent of its credit unions annually, and the rest on a 2–3 year cycle. ASI management noted that they conduct most of their examinations jointly with state credit union supervisors. For credit unions with at least $100 million in assets, ASI has a process of enhanced monitoring, which includes quarterly reviews, as well as on-site reviews annually or semiannually. As needed, ASI can issue a corrective action, such as advancing funds to an insured credit union on a short-term basis to aid in the credit union’s liquidity needs.

Independent Actuarial Reviews Found That ASI Had a Strong Financial Ability to Pay Claims under Different Scenarios

ASI retains an independent actuarial firm to conduct analyses for the company. The actuarial firm conducts a study of the adequacy of ASI’s capital every 3 years, which looks at the company as a whole and its ability to pay present and future claims for losses experienced by the credit unions it insures, under different economic scenarios; and an annual study of ASI’s loss experience to help estimate loss reserves and render an annual statement of actuarial opinion on the adequacy of its loss reserves.

Capital Adequacy

The four most recent capital adequacy studies, which covered calendar years 2009–2015, indicated that ASI’s ability to pay claims was strong. The 2010 capital adequacy study—conducted near the end of the financial crisis—indicated ASI’s ability to pay claims was strong, but it also reported that ASI’s ability to pay claims had decreased. For the most recent capital adequacy study, the actuarial firm’s analysis found that ASI’s ability to pay claims was strong under each of three economic scenarios (expansion, recession, and depression). For example, the actuarial firm estimated the probability that ASI could withstand a 1-year and 5-year recession as 99.7 percent and 97.3 percent, respectively. According to staff from the actuarial firm, the capital adequacy study serves as a financial model to assist ASI management in its decision making. They noted ASI’s management is as important as the study’s findings because even with adequate capital, a company could fail based on mismanagement or fraud, which cannot be modeled.

According to staff from the actuarial firm, ASI could face difficulty paying claims for losses if one or more of its largest credit unions were to suffer severe losses. The firm reported that as of December 31, 2015, ASI had $218 million in assets (cash and investments) readily available to pay claims, but as of year-end 2015, 14 of its credit unions each had more than that amount in total insured deposits. However, the actuarial staff told us they factored this risk into their analysis and that the larger the credit union (by asset size), the smaller the probability of a severe loss (expressed as a percentage of the credit union’s total assets).

Additionally, the actuarial firm analyzed the capital adequacy of ASI’s wholly owned subsidiary, Excess Share Insurance Corporation, which can affect ASI’s financial condition because ASI offers it various funding sources and a guarantee. The actuarial firm’s 2016 study showed the subsidiary’s ability to pay claims under the three economic scenarios was strong. ASI management told us they believe the risk posed by its subsidiary to be small, and that multiple adverse events would have to occur simultaneously for it to impair ASI’s financial condition. To transfer some of this risk, the subsidiary carries a reinsurance policy for its excess insurance line of business.

The actuarial studies also noted that ASI has other sources of funding to help pay claims, including special assessments, lines of credit, and increases to the capital contribution rate it charges. For example, during and after the 2007–2009 financial crisis, ASI (1) charged its insured credit unions a special premium assessment each year in 2009–2013; (2) borrowed $22 million from its line of credit to pay initial claims in 2009 (which according to ASI management was repaid in full within 6 months); and (3) increased the credit unions’ capital contributions rate in 2010, from a rate ranging between 1 percent and 1.3 percent to a rate of 1.3 percent of total insured deposits, which ASI management told us enhanced the company’s capital adequacy.

Loss Reserves

Each of the actuarial firm’s annual loss reserve studies conducted during 2011–2015 found that ASI’s reserves for losses were reasonable and consistent with amounts computed based on actuarial standards of practice, and met the requirements of Ohio insurance laws. ASI maintains a reserve for losses to cover its estimated unpaid liability for reported and unreported loss claims. To assist management with its determination of loss reserves, the actuarial firm annually analyzes ASI’s loss reserve experience and reviews the assumptions ASI uses to determine its reserves for losses. The reserve studies identified some potential risks—for example, the possibility that some of ASI’s credit unions could cancel their deposit insurance coverage and withdraw their capital contributions, which would reduce ASI’s capital (but also reduce its exposure to potential losses).

In its 2016 loss reserve study, the actuarial firm stated that it did not believe that significant risks and uncertainties were present that could result in material adverse deviation of ASI’s loss reserves. The firm based its conclusion on the presence of certain favorable factors that offset the risks and uncertainties identified in previous years. These factors included the low ratio of the company’s held reserves to its capital, and that ASI’s held reserves were at the high end of the actuarially- determined range of reserves estimated to be reasonable. However, the actuarial firm staff stated that the absence of such risks and uncertainties did not imply that factors could not be identified in the future that could have a significant influence on ASI’s reserves.

Privately and Federally Insured Credit Unions Had Similar Regulatory Ratings, but Differed in Geographic and Deposit Concentration

ASI’s risk profile depends in large part on the financial condition of the privately insured credit unions that it insures. We reviewed the CAMEL ratings (which regulators use to rate a credit union’s performance and risk profile) of privately insured credit unions, and compared them to those of federally insured credit unions. We found that, in the aggregate, privately and federally insured credit unions had similar CAMEL ratings during 2006–2015. For example, as seen in figure 2, roughly the same percentages of privately and federally insured credit unions were rated satisfactory (CAMEL ratings of 1 or 2). For both groups, the percentage of troubled credit unions (CAMEL ratings of 4 or 5) peaked in 2011 and then declined. These similarities remained roughly the same (for both satisfactory and troubled credit unions) when we reviewed the percentage of assets in credit unions by CAMEL rating rather than percentage of individual credit unions.

For further review, we also selected one indicator in each of five categories––capital adequacy, asset quality, loss coverage, profitability, and liquidity––regulators commonly use to assess the financial health of credit unions. The median values for all of these indicators were similar for privately and federally insured credit unions from 2011–2015.

The sizes of privately and federally insured credit unions also were roughly similar. In 2015, the majority of insured credit unions had less than $100 million in total assets (see table 1). For privately and federally insured credit unions, respectively, the median total assets were roughly $34 million and $27 million, and the median numbers of members were roughly 4,300 and 3,200.

However, our analysis shows that privately insured credit unions have higher geographic and deposit concentration than federally insured credit unions, which can present risks. Specifically,

Privately insured credit unions are much less geographically diverse than federally insured credit unions because they operate solely in nine states. Forty-two percent of ASI-insured credit unions are in Ohio and an additional 30 percent are in Illinois (18 percent) and Indiana (12 percent). This geographic concentration may create risks for ASI because economic downturns are sometimes concentrated in particular regions of the country. NCUA staff noted that previous private deposit insurers have failed mostly as a result of severe regional economic shocks (or in some cases a single major fraud).

The total insured deposits of privately insured credit unions are concentrated in a much smaller number of credit unions than for federally insured credit unions. In 2015, ASI’s 2 largest credit unions (by total assets) represented 15 percent of its total insured deposits, and its 10 largest represented 54 percent of its insured deposits. In comparison, NCUA’s 10 largest insured credit unions (by total assets) made up 15 percent of total insured deposits in 2015. This concentration of insured deposits may be viewed as a risk to ASI because, as discussed previously, ASI could face difficulty paying claims for losses if one or more of its largest credit unions were to suffer severe losses.

Credit Unions We Reviewed Largely Complied with Disclosure Requirements, but Some Disclosure Provisions Lack Specificity

Privately insured credit unions we reviewed largely complied with requirements to disclose that they are not federally insured. But a lack of specificity in Regulation I provisions that relate to disclosure location (drive-through windows), format (signage dimensions and font size), and advertising (printed materials) may have contributed to some variations we saw in compliance with disclosure rules.

Disclosure signage at teller and drive-through windows. The 47 privately insured credit unions we visited were largely in compliance with CFPB’s requirement for disclosures at each station or window where deposits are normally received. For example, 45 of the 47 credit unions displayed a disclosure at teller windows. Of the two that did not display signs at teller windows (both of which were small employer-based credit unions), one had a disclosure on the front door and the other had a disclosure on a bulletin board outside the credit union, but still within the employer’s building. However, 7 of the 17 credit unions we visited that had drive-through windows did not have disclosures at the window (see fig. 3). While Regulation I states disclosures are needed at each station or window where deposits are normally received, it does not specifically cite drive-through windows. In contrast, the regulation specifically excludes certain other places of deposit from requiring the disclosure. For example, it states that disclosure is not needed at automated teller machines or point-of-sale terminals. CFPB staff told us that, in their view, a plain reading of Regulation I would include a drive-through window as a “station or window where deposits are normally received,” and thus require disclosure.

We also observed that the dimensions and font sizes of the disclosure signage varied among credit unions, with some having signage too small to be easily read, or not placed conspicuously. At 28 of 47 credit unions we visited the signs measured smaller than 3 by 7 inches. The sign we commonly observed measured 2-¼ inches by 4 inches, which is larger than a business card, but smaller than an index card (see fig. 4). Additionally, in more than half the credit unions we visited, we found the font size of the disclosures was too small to be easily read when standing at the teller window. Further, at 7 of 47 credit unions, disclosures were placed where they were not easily noticed. For example, one was placed on a windowsill across the room, another at a teller station covered with other materials, and another at the bottom of an 8 by 10 inch sign containing a lot of other information about the credit union’s policies.

CFPB does not provide official signage to privately insured credit unions and Regulation I does not specify signage dimensions or font size requirements. Instead, Regulation I states the disclosures must be “clear and conspicuous and presented in a simple and easy-to-understand format, type size, and manner” but does not provide definitions, parameters, or illustrative examples of what would constitute simple and easy to understand. By comparison, NCUA provides official signs to federally insured credit unions to display at each station or window where insured account funds or deposits are normally received. NCUA’s regulation notes credit unions should not alter the font size of the official sign when used for this purpose. The sign itself, which measures 3 by 7 inches. can be ordered and downloaded from NCUA’s website.

Disclosures on websites. We also reviewed 102 privately insured credit union websites and found that almost all of these websites complied with CFPB’s requirement to disclose on their main Internet page that the institution is not federally insured. Three credit unions did not have the disclosure on their main Internet page (each of the three had the disclosure on a different page of its website). However, on many websites (28 of 99) the disclosures were not easily seen or readable. For example, the overall space the disclosure occupied or its placement next to or between colorful or larger graphics made it difficult to notice the disclosures in these cases. Additionally, we observed that more than half the websites (60 of 99) used a font size that was smaller than that used for the other text on the same webpage (see fig. 5).

CFPB’s Regulation I states that the website disclosures, like all other required advertising and premises disclosures, should be “clear and conspicuous and presented in a simple and easy to understand format, type size, and manner,” but CFPB does not define these terms or specify font size requirements for websites. In comparison, NCUA’s regulation for federally insured credit unions specifies that the disclosure must be in a size and print that is clearly legible and no smaller than the smallest font size used elsewhere.

Disclosures in advertising (printed materials). On our visits to privately insured credit unions we obtained printed materials (such as brochures, promotional flyers, and newsletters which could be considered advertisements), and 8 of the 36 credit unions from which we obtained samples of printed materials had at least one item that did not contain a disclosure. Regulation I states “all advertisements” except those specifically enumerated must disclose a lack of federal deposit insurance, but the regulation does not define what constitutes an advertisement. CFPB staff told us the agency does not have any guidance or commentary on what constitutes “all advertisements.” In comparison, NCUA’s regulation for federally insured credit unions defines advertising, and also provides examples. In NCUA’s regulation, an advertisement is “a commercial message, in any medium, that is designed to attract public attention or patronage to a product or business.” Furthermore, NCUA’s regulation specifies that advertising includes print, electronic, or broadcast media, displays and signs, stationery, and other promotional material.

Disclosures in periodic statements, account records, and signature cards. Representatives of all nine state credit union supervisors with whom we spoke told us that privately insured credit unions were generally compliant with the requirements to (1) disclose on periodic statements and certain other account records a lack of federal deposit insurance, and (2) obtain written acknowledgment from depositors on this lack of federal insurance, as is generally required. The state credit union supervisors said they checked a sample of periodic statements, account records, and signature cards for new accounts as part of their routine examinations of privately insured credit unions.

Reviews of compliance. Overall, compliance levels with disclosure requirements have improved since our 2003 review of privately insured credit unions, which included an assessment of their compliance with federal disclosure rules. In 2003, we found that 36 of 57 credit unions had the required disclosures on premises. Similarly, in 2003, 39 of 78 websites and 93 of 227 printed materials we reviewed had the required disclosures.

CFPB has not had any findings, observations, or evaluations regarding privately insured credit unions’ disclosures. CFPB staff told us the agency has not received any complaints related to private deposit insurance. CFPB staff said they have reviewed privately insured credit unions’ websites at a very informal level and the websites seemed to be complying with Regulation I. As previously noted, CFPB shares enforcement authority for Regulation I with FTC. CFPB staff told us that state credit union supervisors and attorneys general also have the authority to enforce Regulation I, as necessary.

The state credit union supervisors in the nine states with privately insured credit unions similarly told us that compliance with disclosure requirements has not been a problem in recent years. They said that their routine examinations of state-chartered credit unions check for disclosures on premises, on websites, in advertising materials, and, as noted earlier, by reviewing selected periodic statements, account records, and signature cards. They said that if examiners observe noncompliance with disclosure requirements, they cite it as an examination finding and expect the credit union to promptly correct the issue and display the proper signage or disclosure.

While we generally found that compliance levels were high, Regulation I may be interpreted and enforced differently by different credit unions and state regulators. Without clarity on whether or not drive-through windows are required to have disclosures, some credit unions may continue to not display them at these windows. Additionally, without more clarity or guidance around dimensions and font sizes for disclosures, the disclosures may be too small to be easily read or noticed. Further, there may continue to be confusion about what constitutes “advertising” and whether certain printed materials are required to include disclosures. As a result, the state credit union supervisors and the credit unions themselves may face challenges consistently monitoring and complying with Regulation I. In turn, credit union members may not always be consistently and adequately informed that deposits are not federally insured.

Conclusions

Deposit insurance helps protect depositors from losing their money in the event a financial institution fails. By law, any institution that does not have federal deposit insurance must clearly and conspicuously inform consumers that the institution is not federally insured and privately insured credit unions we reviewed largely complied with disclosure requirements. However, the instances we observed of missing disclosures or disclosures that were too small to be easily read or inconspicuous suggest that the lack of specificity in some provisions of Regulation I has led to inconsistencies in interpretation. By clarifying Regulation I, CFPB would facilitate state credit union supervisor monitoring and credit union compliance and would better ensure that consumers were informed that their deposits are not federally insured.

Recommendations for Executive Action

We are making three recommendations to help state credit union supervisors and privately insured credit unions better interpret Regulation I and inform consumers when an institution is not federally insured. CFPB should issue guidance to (1) clarify whether drive-through windows require disclosures; (2) describe what constitutes clear and conspicuous disclosure, including minimum signage dimensions and font size for disclosures; and (3) explain and provide examples of which communications are advertising.

Agency Comments

We provided CFPB, FHFA, and NCUA with a draft of this report for review and comment. In its written comments, reproduced in appendix III, CFPB agreed with our recommendations. CFPB noted that the agency recognizes that providing guidance clarifying Regulation I may improve privately insured credit unions’ understanding of and compliance with the federal disclosure requirements. Additionally, CFPB stated that the agency intends to explore options that will most effectively provide guidance regarding Regulation I, such as issuing a bulletin that could be published in the Federal Register or posted on the agency’s website. CFPB, FHFA, and NCUA also provided technical comments, which we incorporated as appropriate. We also provided selected relevant portions of the draft to ASI, its third-party actuarial firm, the Ohio Departments of Insurance and Commerce, and the other eight state credit union supervisory authorities for their technical review, and we incorporated their comments as appropriate.

We are sending copies of this report to the appropriate congressional committees, agencies, and other interested parties. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-8678 or cackleya@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

This report (1) discusses regulatory and other assessments of American Share Insurance (ASI), the sole private deposit insurer, and (2) examines the level of compliance with disclosure requirements by credit unions that do not have federal deposit insurance. The Fixing America’s Surface Transportation Act (FAST Act) includes a provision for us to review private deposit insurers and privately insured credit unions’ disclosure compliance in the United States. Our scope includes the nine states that permit credit unions to use private deposit insurance and have credit unions that have chosen to do so: Alabama, California, Idaho, Illinois, Indiana, Maryland, Nevada, Ohio, and Texas. Some credit unions in Puerto Rico are insured by a quasi-governmental entity––the Public Corporation for the Supervision and Insurance of Cooperatives––and these credit unions are not included in the scope of this report. In addition, this report does not compare ASI’s reserves and capital adequacy to those of the National Credit Union Administration’s (NCUA) National Credit Union Share Insurance Fund because the two entities have different legal requirements and risk profiles, use different models to help estimate reserves, and use different assumptions and methods to help determine capital adequacy. Based on this, we limited the scope of the report to solely cover regulatory and other assessments of ASI, instead of an analysis or comparison of the two entities.

To gather information about ASI, we identified the company’s regulators and legal requirements and reviewed laws and regulations pertaining to the company. We reviewed Ohio law and implementing regulations, which establish the powers and authorities governing credit union guaranty corporations, such as ASI. We interviewed the company’s primary regulators (Ohio Departments of Insurance and Commerce), as well as representatives from the state credit union supervisors in the other eight states in which ASI operates. To determine how the Ohio Department of Insurance assessed ASI’s financial condition, we reviewed documentation such as the most recent examination report covering calendar years 2008–2012 and financial analyses of ASI covering calendar years 2013– 2015. We also compared the department’s process with the guidelines recommended by the National Association of Insurance Commissioners (NAIC) and confirmed with NAIC staff that the department’s procedures were consistent with NAIC guidelines. Finally, we interviewed staff at the Federal Housing Finance Agency (FHFA), which oversees the Federal Home Loan Bank (FHLBank) System, and the FHLBank of Cincinnati (of which ASI is a member) to determine their oversight role with regard to ASI and to obtain information about the number and status of privately insured credit unions applying for membership to the FHLBanks.

We reviewed ASI’s annual reports and audited financial statements for 2008–2015 and other documentation, such as the company’s investment policy, its examination and insurance policy, and its application form and process for credit unions seeking private deposit insurance. We interviewed ASI management about the company’s history, governance structure, regulatory and financial reporting requirements, underwriting policies, and capital and reserves requirements. We also reviewed reports from the third-party actuarial firm that ASI retains, including the firm’s analyses of ASI’s capital adequacy for 2009–2015 (conducted every 3 years), annual analyses of ASI’s unpaid loss and loss adjustment expense for 2011–2015, and annual statements of actuarial opinion for 2011–2015, as well as the firm’s analysis of capital adequacy for ASI’s wholly-owned subsidiary for 2015. We interviewed the actuarial firm’s staff about their analyses related to these studies and obtained information about the assumptions and methods used. For the most recent capital adequacy study, our internal actuarial staff reviewed the actuarial firm’s modeling approach and certain key methods and assumptions, including those related to the three economic scenarios used in the study. Additionally, we inquired about the firm’s internal peer review process and steps taken to ensure the completeness and accuracy of the models used to assess ASI’s capital adequacy and reserves for losses. We did not conduct our own independent assessment of ASI’s capital adequacy and reserves for losses and therefore cannot make our own actuarial determination or opinion.

To review information about the credit unions that ASI insures, we reviewed CAMEL ratings for privately and federally insured credit unions for 2006–2015. We also used financial data from SNL Financial (2011–2015) to analyze selected financial indicators for privately and federally insured credit unions. We selected these financial indicators for further review because they had been previously identified by regulators as metrics to assess a credit union’s financial health and used in prior reports looking at credit unions. For our previous work, we had obtained information from NCUA on the indicators it typically uses to assess credit unions’ financial health and we selected one indicator in each of the following five categories: capital adequacy, asset quality, loss coverage, profitability, and liquidity. We analyzed data from SNL Financial in September 2016 for year-end 2011–2015. We presented median rather than the mean because means can be skewed by extremely high or low values. We assessed the reliability of the CAMEL ratings for privately and federally insured credit unions, as well as the SNL Financial data for the five financial indicators, by requesting information about the underlying data, how they are collected, and data reliability testing. We found the data to be sufficiently reliable for the purposes of our review.

To determine compliance with disclosure requirements, we identified disclosure requirements for credit unions that do not have federal deposit insurance by reviewing the Federal Deposit Insurance Act disclosure provisions and the Bureau of Consumer Financial Protection’s (CFPB) corresponding Regulation I. To review on-site disclosure requirements (at stations or windows), we selected a nonprobability sample of 53 privately insured credit unions and conducted in-person, unannounced site visits at 47 of these 53 (41 site visits to unique credit unions and 6 site visits to multiple locations of the 41 credit unions). We were unable to enter the other six credit unions, usually because they were closed when we attempted our visit. The sample was selected to ensure diversity across a number of criteria related to possible differences in compliance. We selected credit unions for their geographic diversity (credit unions in different regions of the country and different states), and to achieve a mix of credit unions of different asset sizes, main retail and branch locations, and urban and nonurban areas. We also took proximity to GAO offices into account as a secondary criterion. Because there may be variation in how state regulators and examiners check for compliance with disclosure requirements, we conducted site visits in four different states. We selected these states to obtain a mix of states in terms of numbers of privately insured credit unions––two with many (Ohio and Illinois), one with a moderate number (California), and one with few (Maryland)––and for geographic diversity. For the geographic distribution (by number and percentage) of all the privately insured credit unions across the nine states that have them, see table 2.

We selected privately insured credit unions of varying sizes, as defined by total assets, and selected credit unions for site visits that were roughly representative of the overall population of credit unions. For instance, almost 75 percent of privately insured credit unions had total assets of less than $100 million and therefore the majority of credit unions we selected for our site visits did as well.

We conducted site visits at both main retail and branch locations. We selected locations to include both urban and nonurban areas. We roughly defined “urban” as a downtown area where consumers are more likely to walk to the credit union and “nonurban” as an area where they are more likely to drive. Credit unions in nonurban areas were more likely to have drive-through teller windows. Staff conducted site visits between June and August 2016. On each visit, staff followed a protocol to help ensure consistency and completed a data collection instrument to record their observations. The protocol included checking for signs at teller and drive- through windows and observing sizes and clarity of signs, among other items. When possible, we obtained photographic evidence to document examples of disclosure signage. Two GAO analysts recorded their observations at each site, and any discrepancies were reconciled by discussions and photographic evidence where available. We aggregated the site visit data and present summary-level information in this report.

To determine compliance with disclosure requirements for the credit unions’ main Internet page, we reviewed the websites of all 102 privately insured credit unions that had a website during the time of our review. Analysts followed a protocol to help ensure consistency of observations about the clarity, placement, and font size of disclosures observed and completed a data collection instrument for each credit union. A second analyst independently reviewed each credit union’s website to verify the accuracy of information collected by the first analyst. Any discrepancies between the two analysts were identified, discussed, and resolved by referring to the source websites.

To determine compliance with disclosure requirements for advertising (printed materials), we obtained samples of printed materials (such as brochures, promotional flyers, and newsletters) from 36 of the 41 unique credit unions we visited where such printed materials were readily available. We assessed whether these printed materials had proper disclosures, taking into account the specified exclusions regarding advertising noted in Regulation I. To determine compliance with the requirement to (1) provide disclosures in periodic (monthly) statements and account records, and (2) get written acknowledgment from depositors that the institution does not have federal deposit insurance, we relied on testimonial evidence from the nine state credit union supervisors we interviewed because we determined that their compliance review in this area was adequate for our purposes—for example, each state reviews a sample of new accounts as part of the routine examination each credit union receives.

Because CFPB is the federal entity responsible for issuing disclosure regulations, we interviewed CFPB staff about the agency’s oversight and findings related to compliance with these disclosure requirements. We compared CFPB’s disclosure requirements for credit unions that do not have federal insurance with those of NCUA for federally insured credit unions. Because privately insured credit unions are state-chartered, we interviewed the respective state credit union supervisors in each of the nine states about their annual examinations of privately insured credit unions, including their review of compliance with requirements to disclose a lack of federal insurance. We also interviewed representatives from the Credit Union National Association, National Association of State Credit Union Supervisors, and the Ohio Credit Union League to ask whether they were aware of any issues or concerns related to compliance with disclosure requirements for privately insured credit unions.

To determine reasons why credit unions chose private or federal deposit insurance and to obtain views on the benefits and risks of each, we interviewed representatives from 10 credit unions that had switched to or from private insurance in recent years. We identified these credit unions by reviewing NCUA’s Insurance Activity Reports (from January 2008 to July 2016), which identify deposit insurance conversions, and then confirmed these conversions with NCUA and ASI. We interviewed representatives from five of the eight credit unions that converted from federal insurance provided by NCUA to private deposit insurance provided by ASI within the past 5 years. Additionally, we interviewed representatives from five credit unions that most recently converted from private (ASI) to federal (NCUA) deposit insurance. The conversions took place in 2008–2009. These selection criteria were chosen because representatives from credit unions that recently converted should be able to provide reasons why their credit union made the choice to switch from federal to private deposit insurance, or vice versa, and have the most up- to-date information. We also interviewed representatives from credit union trade associations, NCUA, and ASI about the reasons credit unions choose private versus federal deposit insurance.

We conducted this performance audit from February 2016 to March 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Reasons Credit Unions Chose Private or Federal Deposit Insurance

Credit unions in the United States can be federally or state-chartered, which determines their primary regulator for safety and soundness and also their options for deposit insurance. Federally chartered credit unions are regulated by the National Credit Union Administration (NCUA) and must be federally insured by NCUA’s National Credit Union Share Insurance Fund, which provides up to $250,000 of insurance per depositor for each account ownership type. State-chartered credit unions are regulated by credit union supervisors in their respective state and also can be federally insured by NCUA or, in some states, choose a private insurer. American Share Insurance (ASI) is the sole insurer for private deposit insurance to credit unions and provides coverage up to $250,000 per account. Credit unions sometimes change deposit insurers—for example, converting between federal and private deposit insurance. According to information provided by NCUA, eight credit unions converted from federal to private deposit insurance in 2012–2016, and five converted from private to federal deposit insurance in 2008–2009 (the most recent such conversions).

Representatives of some credit unions that converted from federal to private deposit insurance cited the following reasons:

Greater coverage for members. ASI insures $250,000 per account, whereas NCUA insures $250,000 per depositer for each account ownership type. Thus, ASI provides more coverage for members with more than $250,000 in a particular deposit type because they can structure their deposits into multiple accounts of $250,000 or less.

Reduced federal oversight. Representatives of some state- chartered credit unions described state regulation and oversight, including the examination process, as less burdensome than federal regulation and oversight.

Cost savings. Credit union representatives said that private deposit insurance was less expensive than federal deposit insurance following the 2007-2009 financial crisis because ASI’s special premium assessments were lower than the premiums of the National Credit Union Share Insurance Fund, and state regulatory fees are less than those of NCUA.

Comparable business models. A credit union representative noted that the credit union business model aligns well with ASI—both are not-for-profit organizations that exist to serve their members, and member credit unions sit on ASI’s board of directors.

Representatives of some credit unions that converted from private to federal deposit insurance cited the following reasons:

Full faith and credit of U.S. government. Deposits are backed by the full faith and credit of the U.S. government, which provides depositors with greater confidence and security.

Concern about private insurer during financial crisis. A representative of one credit union told us the main reason it switched to NCUA insurance was because it was concerned that ASI might not survive the 2007–2009 financial crisis.

Access to additional funding source. One credit union representative told us the credit union switched to federal deposit insurance in 2008 to allow it to join a Federal Home Loan Bank, which provided it with access to an additional funding source.

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact name above, Jason Bromberg (Assistant Director), Beth Faraguna (Analyst in Charge), Caitlin Cusati, Paul Foderaro, Alice Hur, Risto Laboski, Yola Lewis, Ned Malone, Scott McNulty, Marc Molino, Barbara Roesmann, Jessica Sandler, Frank Todisco, and Shana Wallace made key contributions to the report.