NCUA: RBC And Supplemental Capital Are Like Peanut Butter And Jelly

Responding to Congressional pressure, NCUA released a comprehensive report yesterday  defending its decision to impose an updated Risk-Based Capital system on complex credit unions and renewed  its call   for congress to authorize expanded use of supplemental capital by the industry.

“The high-quality capital that underpins the credit union system is a bulwark of its strength and key to its resiliency during the recent financial crisis. However, most federal credit unions only have one way to raise capital—through retained earnings, which can grow only as quickly as earnings. Thus, fast-growing, financially strong, well-capitalized credit unions may be discouraged from allowing healthy growth out of concern it will dilute their net worth ratios and trigger mandatory prompt corrective action-related supervisory actions.”

NCUA called on Congress to pass HR 989, introduced at the urging of New York credit unions by Long Island Republican Peter King and California Democrat Brad Sherman.  It would allow NCUA to authorize well capitalized credit unions to take subordinate supplemental capital provided doing so does not alter the cooperative nature of the industry.

Keeping in mind that low-income credit unions can already use supplemental capital, and that a more sophisticated capital system goes hand-in-hand with a more sophisticated capital system this proposal is common sensical to me but I know not all credit union people would agree.

In her CU Times article this morning Heather Anderson highlighted NCUA’s explanation of its supervisory powers. (It’s in Section VI of the report).  For those of you concerned that NCUA is giving itself a little too much flexibility with examiner Guidance the report will provide few assurances.

“While elements of a supervisory review of capital adequacy would be similar across credit unions, evaluation of the level of sophistication of an individual credit union’s capital adequacy process should be commensurate with the institution’s size, sophistication, and risk profile, similar to the current supervisory practice. NCUA will develop and publish supervisory guidance for examiners on how to apply this provision.” It explained

This means that the next stage of the RBC process will hopefully involve a healthy dialogue between the industry and regulators explaining just how much examiners are told to mandate capital requirements for individual credit unions that are in compliance with regulatory requirements.  With interest rates likely to rise over the next three years expect to hear plenty more about interest rate risk.

The report is also another example of NCUA demonstrating that it is in fact responsive to, as opposed to indifferent to,  congressional concerns. This wasn’t entirely clear to me after testimony by Chairman Mats before the House Financial Services Committee earlier this year.  Her performance was a great example of how to lose friends and not influence people.     It is modeled after   HR 2769 which was voted out of the House Financial Services Committee.  It calls on NCUA to review and explain four aspects of its RBC rule.

Here is the report.

I’ll be blogging again on Monday.  In the meantime  Happy Thanksgiving everyone and thanks for reading.

November 24, 2015 at 9:16 am 3 comments

Headed in the Right Direction on FOM Reform

Yesterday, NCUA unveiled more than a dozen distinct changes to its Field of Membership (FOM) regulations. It will take a few days to figure out the precise impact these changes, some of which are highly technical, will have on credit unions. But, regardless of their ultimate impact, NCUA’s proposal is crucial when viewed in the context of the larger challenges facing the industry.

Let’s face it, credit unions are constrained by a legislative and regulatory framework designed in the early part of the 20th Century. Limiting credit unions to distinct employee groups, distinct communities, and distinct associations made sense in an era where most communities had a manufacturing base and the suburbs had not yet changed the concept of community. Today, the Internet creates world-wide communities and the traditional model of an employee picking up his paycheck on Friday night on his way out of the local mill is obsolete.

Consequently, there is no bigger challenge facing the credit union industry writ large than removing restrictions on who it can serve. Against this backdrop, NCUA deserves credit for taking a fresh look at its existing FOM regulations. But let’s remember that it was only in 2010 that NCUA, under pressure from banker litigation challenging its flexibility when approving community charter expansions, imposed many other restrictions that NCUA is now proposing to tinker with. For example, before 2010, credit unions could provide a “narrative” explaining why a proposed service area constituted a well-defined local community. A 2010 amendment did away with this flexibility, instead mandating that credit unions fit proposed expansions into pre-defined statistical areas.

Yesterday’s proposal doesn’t bring back the narrative option, but by making some of those technical changes I was referring to, it potentially gives credit unions greater flexibility to serve communities, particularly in underserve areas.

Keeping an eye on all of these efforts, of course, is the banking lobby. Its core effort over the last two decades has been to restrain the growth of credit unions by retraining FOM flexibility. The framework that results from this proposal can’t be so flexible as to bear little resemblance to the federal Credit Union Act or result in community charter expansions that can be attacked as arbitrary.

This is why it is so important to view these regulations not as an end in themselves, but as part of a larger effort to educate the public and elected representatives about why charter reform is so important. NCUA deserves credit for this proposal. But the type of changes the industry most needs can only come through legislative action. In the meantime, this is one of those key proposals where substantive feedback, particularly from individual credit unions, is absolutely crucial.


November 20, 2015 at 9:01 am Leave a comment

How To Deal With Inactive Accounts

As a life-long suburbanite from Long Island I of course know what every  good rancher knows: that a herd must be culled to remain strong. I also know  a financial institution can be harmed by  inactive members.  So today I’m giving you advice that will save you money and make your overall membership stronger regardless of where your credit union is located .

New York’s annual  period for reporting abandoned property recently came to an end and, having  sampled  some of the questions that come into the Association’s compliance hotline,  I am here to remind all of you FCUs  out there that NCUA has granted you ample power to fee accounts out of their misery.  Used properly these powers can help minimize the amount of unclaimed funds your credit union must deal with.

And let’s be honest unclaimed property is annoying to deal with.  In NYS most funds are considered unclaimed after three years of account inactivity. The process for sending these funds back to the state is in desperate need of a statutory overhaul to reflect modern technology.  You must compile a list of dormant accounts, mail letters to these account holders, publish a list of dormant accounts  and ultimately remit the unclaimed funds to the state. The final report is due by November 10.  A great New York state resource is the Comptroller’s Handbook on Abandoned Property.  (

Is there anything you can do to help minimize the time and expense associated with this process? Absolutely.  NCUA has opined on several occasions that you can Fee these accounts out of existence before they  become abandoned property so long as you comply with Truth in Savings notice requirements(12 CFR 707.4).  The power to fee inactive accounts  trumps state level restrictions  on dormant accounts.   For example Virginia passed a law stipulating that fees could not be assessed against a dormant account unless three conditions were satisfied including providing the account holder with three months advanced notice of the fee.  NCUA authorized federal credit unions to charge the fee anyway, concluding that the fee was preempted by NCUA’s regulations permitting credit unions to charge dormant account fees.  It explained that:

“A state does not have authority to regulate an FCU’s account operation until an account achieves unclaimed property status, which is five years in Virginia. Once unclaimed property status is reached, the state does not acquire any authority to reach back and affect an FCU’s action’s before an account’s abandonment.” (

Just so we are all on the same page here you still l have to comply with a state’s abandoned property law but that law can’t block you from charging inactivity fees

An even more expansive interpretation of FCU powers was issued in 2008 when the agency said that a Texas FCU could close accounts that have been inactive more than 12 months with balances of between one cent and 500 dollars and mail the members the balance  provided it did so consistent with its own policies and bylaws.

One more thing to keep in mind.  An FCU may have bylaws that terminate a member’s membership if  his  share balance falls below par  value  and the member does not increase the balance within a specified time period. Although the time period is left to an FCU’s discretion in the FCU Bylaws, it cannot be zero and should be reasonable.

By the way tune in to today’s Board meeting at 10AM if you get a chance.  The Board is expected propose FOM reforms. ….



November 19, 2015 at 9:27 am Leave a comment

No Review of Mortgage Lending Reforms?

The President yesterday signaled he is in inclined to slam the door shut on even sensible reforms of the Dodd-Frank mandated mortgage reforms. It looks like we will have to wait for the next President to make legislative adjustments to mortgage reforms. (

HR 1210 (|/home/LegislativeData.php) introduced by Congressman Barr would extend Qualified Mortgage protections to any creditor who holds a mortgage in portfolio. Currently, QM protections are given to institutions with $2 billion or less in assets that originate 500 or fewer mortgages a year and hold the loans in portfolio for at least three years. The precise protections afforded QM loans will be determined by the courts but the basic idea is that if a creditor demonstrates that a loan is a QM loan, then it is protected against lawsuits.

In his statement threatening to veto the bill, President Obama asserts that the bill would “undermine critical consumer protections by exempting all depository financial institutions, large and small, from QM standards.” True enough, institutions would, for example, be able to extend loans to borrowers without worrying about debt-to-income ratios. In other words, larger institutions would find it easier to make the type of loans that got us into this mess in the first place.

The problem is that the real cause of the reckless underwriting standards that caused the mortgage meltdown was a business model in which mortgages were originated to be sold and bought to be packaged into bonds. No one really cared about credit quality because no one thought they would be the ones holding these ticking time bombs when the ticking stopped. What I like about HR 1210, at least conceptually, is that it seeks to address this core problem by letting the free market determine what risks are appropriate. After all, credit unions and small banks are allowed greater underwriting flexibility because they have a direct stake in making sure loans get repaid. So long as larger institutions are willing to take on the same responsibility and are willing to accept the consequences that come when they make the wrong choices, why shouldn’t they have the same flexibility?

There are many important concepts imbedded in Dodd-Frank but its execution is very much a work in progress. Frankly, I don’t expect the President to chip away at legislation that has emerged for better or worse, mainly for worse, as one of his primary legacies. Hopefully, the next Administration will be more willing to reexamine what has been done in the name of a safer mortgage market. I just hope two years isn’t too long a wait.

November 18, 2015 at 9:00 am Leave a comment

The EMV sideshow: Heavy on Politics, Light On Facts

The best way to deal with an argument you can’t win is to start another argument.  Not only on the merchants have t some great lawyers, and great lobbyists but they know how to frame an argument better than any industry I have watched.

The latest example of their talent for changing the subject  comes in the form of a joint letter signed by nine  Attorneys General including Eric T. Schneiderman  of New York and Lisa Madigan of Illinois.  In the letter they urge the country’s largest banks to expedite chip-and-pin technology .  They explain that implementation of such technology is “imperative” to protect consumers and that as the largest issuers these banks share a responsibility for a safer system.  (

(Remember that Visa and MasterCard have shifted liability for Point-of-Sale fraud onto merchants who can’t process chip based  transactions for customers  who have been provided with chip cards.  But they don’t require consumers to punch in a PIN code to complete the transaction.  A signature is good enough.)

First the politics:  AG stands for Aspiring Governor. This letter is the latest example of how supporting merchants has been conflated with supporting  consumers.  There are plenty of legitimate criticisms of   the Mega-Banks but lax security is not one of them. Conversely,  merchants get away with acting as if every retailer in the country owns  a hometown bodega and is  eking out a living as it gets nickel-and-dimed to death by banks.  Never mind the fact that major retailers like Target have waited decades to implement chip based card technology and that their indifference has resulted in consumers losing millions of dollars.

Unfortunately  this blame the financial institution strategy is working beautifully.  Instead of criticizing merchants for refusing to adopt chip based technology despite being given several years of lead time policy makers are debating the merits of signatures Versus PiIN.

Now for the policy.  In fairness to the merchants,  most countries mandate chip- and-PIN not a signature,  The problem is that there is little evidence that this really makes transactions substantially safer from fraud in the medium to long term . As Julie Conroy, a fraud analyst,  recently  explained  in an  interview with Brian Krebs of the KrebsOn Security website when Great Britain adopted Chip and Pin PIN  there was a dip in  Fraud but criminals quickly adjusted. “The   increased focus on capturing the PIN gives them more opportunity, because if they do figure out ways to compromise that PIN, then they can perpetrate ATM fraud and get more bang for their buck.” A PiN is a static piece of information that can and will be stolen. (

Once again merchants are packaging their financial self interest in the guise of consumer protection.  First there was the swipe fee and now there is the evil card issuer not doing all it can to protect the consumer.  Why does government feel the need to pick sides in what is not a dispute about safety but a dispute about money?

This argument is also  unfortunate because  both sides know that we are debating the merits of chip based technology that is already more than two decades old.  I have no doubt that by the time the debate gets settled criminals will have largely made it obsolete and consumers won’t be any safer.


November 17, 2015 at 8:56 am Leave a comment

Who’s Going To Gamble on Fantasy Sports?

Quick cultural point. I like Adele but I think she could sing this blog and turn it into a hit. But alas, I digress.

What’s gotten my attention this morning is the brewing battle between New York’s AG, Eric Schneiderman and fantasy sports Internet providers FanDuel and DraftKings. While it may not directly impact your credit unions, I wouldn’t be surprised if you find out precisely how many gambling members you have if all the sudden their ability to access these fantasy providers with their credit cards is blocked.

You might remember that the issue of gambling over the Internet was dealt with on the federal level when Congress passed the Unlawful Internet Gambling Enforcement Act of 2006 (31 USCA Sec. 5301). The statute banned using the Internet to make a bet or wager, but it stipulated that betting does not include participation in any fantasy or simulated sports games. (31 USCA Sec. 5362).

I am sure it’s just a coincidence that two of the highest profile owners in the NFL, Jerry Jones of the Cowboys and Robert Kraft of the New England Patriots, reportedly have invested in fantasy sports companies.

So why do the Attorney Generals of Nevada and New York feel they have the right to block these companies from operating? Because the statute also stipulated that its purpose was not to preempt “any state law prohibiting gambling.” As a result, the Attorney General’s argument centers on his interpretation that fantasy sports are games of chance prohibited under both the state constitution and state law.

Here’s where it gets a little closer to home for your credit union. Actually coming up with a system for enforcing the Internet better bans was left to the regulators. When the pertinent regulations were eventually finalized, they largely left credit unions and banks off the hook provided they have policies and procedures in place for determining if any if their business accounts are involved with gambling. The entities that really have to make a tough call this morning are the credit card networks and third party processors. They are responsible for coding illegal gambling transactions. If they agree with the AG then a member using a credit card to access a fantasy site should be blocked, if they don’t then they should continue processing the transactions as if nothing has changed. FanDuel has suspended New York Business but I don’t believe DraftKings has followed suit

Put this in context. DraftKings and FanDuel are each valued at more than $1 billion. According to Bloomberg business, New York accounts for over 5% of FanDuel’s customers and over 7% of DraftKings. Losing New York would cost then at least $35 million and more importantly put their entire business model at risk.

November 16, 2015 at 9:07 am Leave a comment

Delay Announced In Radical Accounting Changes

Credit unions got a temporary stay of execution yesterday on one of the most importantly regulatory proposals that no one really wants to think about.  The Financial Accounting Standards Board decided to put off until early next year final action on new accounting standards that would radically alter the way your credit union accounts for anticipated losses. ( Perhaps  the Board didn’t want to deal with such a weighty issue around the time of the office holiday party.  You know how crazy  accountants can get when they get a few in them?  Good Times )

Just how big a deal is this proposal? With the caveat that I am so bad at accounting that family legend has it that it was  apparent at the age of ten that I would not be taking over my father’s accounting practice,  if the FASB goes  forward with this proposal  it will have a more direct financial impact on most credit unions than the risk based capital reforms we have spent so much time fretting  about.  Currently losses have to be recognized when they become Probable.  The FASB is moving towards an approach in which losses would have to be accounted for  based on expected losses   using a broader range of data such as the historical performance of similar contracts.  It raises the real possibility that more money will have to be put aside to  guard against potential future losses  earlier in a loan’s life  to guard against losses that may or may not materialize.  As the exposure draft explains:

“the estimate of expected credit losses would be based on relevant information about past events, including historical loss experience with similar assets, current conditions, and reasonable and supportable forecasts that affect the expected collectability of the assets’ remaining contractual cash flows. An estimate of expected credit losses would always reflect both the possibility that a credit loss results and the possibility that no credit loss results.”  That sounds expensive to me

And I’m not the only one.  In its comment letter the normally understated CUNA predicted that the proposed changes would cause an immediate and drastic increase to the ALLL accounts of credit unions. it contended that this increase, which could double or even triple current ALLLs, would result directly in a reduction of retained earnings for many credit unions.

Even with yesterday’s delay it is still anticipated that the new standards will be finalized in the first quarter of next year and take effect in 2019.  You don’t have as much time as you think.  If I were you I would be getting a preliminary accounting assessment of how this proposal could impact your CU before your accountant starts hitting the holiday party circuit.

Here  is some additional information

i a link to the proposal and FASB’s announcement

November 13, 2015 at 9:25 am Leave a comment

Older Posts

Authored By:

Henry Meier, Esq., Associate General Counsel, New York Credit Union Association

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 376 other followers



Get every new post delivered to your Inbox.

Join 376 other followers