FSOC: NCUA’s Lack of Third-Party Oversight Power Poses Risk to System

Council report says supervisory authority over credit union vendors will help protect entire industry.

The Financial Stability Oversight Council on Friday again called on Congress to give the NCUA supervisory powers over credit unions’ third-party service providers.

In adopting its annual report, the council said that such providers pose a possible risk to the financial system.

“The Council has identified the financial sector’s concentrated dependency on a limited number of service providers, such as cloud service providers, for critical information technology services as a potential risk to financial stability,” FSOC stated.

NCUA Chairman’s Stance

The council consists of financial regulators, including NCUA Chairman Todd Harper, who endorsed the annual report during Friday’s meeting.

He called his agency’s lack of supervisory powers a “growing regulatory blind spot.” The NCUA and the Federal Housing Finance Agency are the only federal financial regulators currently without power over third-party servicers.

Harper added, “We really cannot wait on this any longer. Credit union members deserve the same protections as bank customers.”

Harper noted further that the House version of the annual defense authorization bill included provisions granting the agency that power, however, a House-Senate agreement on the defense bill does not include it.

Pushback From Credit Union Groups

Credit union trade groups oppose giving the NCUA supervisory powers over servicers. They contend that the agency can obtain information from other regulators and that the new responsibilities would result in an increase in the NCUA’s budget.

Climate Issues Addressed

In the annual report, FSOC also identified climate risk as a problem for the financial system.

“Climate-related financial risks could contribute to financial instability through numerous channels, including financial intermediaries experiencing significant losses, impairment of financial market functioning, or the sudden and disruptive repricing of assets,” the report stated.

The council recommended that state and federal agencies keep collecting data on the potential impact of climate change on the financial system, saying, “Financial regulators should continue to promote consistent, comparable, and decision-useful disclosures that allow investors and financial institutions to consider climate-related financial risks in their investment and lending decisions.”

The NCUA and Climate Risk 

The issue of climate risk has been a thorny one for the NCUA. In a draft of its strategic plan, agency staff recommended an assessment that could include the risks posed by credit unions having a high concentration of business in certain industries, such as agriculture or fossil fuels.

Farm-state Republican members of Congress expressed outrage concerning the impact that could have on communities.

When the final strategic plan and accompanying performance plans were released, the agency board endorsed efforts to solicit comment from stakeholders on the issue.

The agency had said that request for information would be released by the end of the year. However, the NCUA board has since acknowledged that deadline would slip.

During Thursday’s meeting of the NCUA board, board member Rodney Hood pledged to work with Harper to ensure that solicitation would be issued as soon as possible.