NCUA Gets Tough on Secondary Capital

September 23, 2019 at 8:15 am Leave a comment

You can be forgiven for wondering if NCUA woke up on the wrong side of the bed when it decided to issue its 23 page guidance to its staff detailing the minimum standards they must use when evaluating the proposed uses of secondary capital by Low-Income Credit Unions (LICUs). Since 1996, secondary capital has been authorized for LICUs to enable them to better serve low-income communities where it may be difficult to raise funds by solely relying on membership growth. In contrast, it is clear after reading this guidance that NCUA has grown weary of how this capital has been used. The bottom line, get ready for some extensive work if you are hoping to incorporate secondary capital into your credit union plans.

Since it has been a while since I’ve blogged on this, let’s go over the basics. LICUs are credit unions, the majority of whose membership is comprised of members with a family income at or below 80% of the Federal Poverty Level. Secondary capital is a type of subordinated debt offered by a LICU to non-member organizations and businesses that can be used for capital. The key is that it is uninsured and must have a maturity of at least five years.

When the authority was originally granted to credit unions, they didn’t even have to get prior approval from the NCUA. My, how times have changed. Starting in 1996, NCUA had to grant approval of secondary capital plans and now this regulation, I mean guidance, imposes detailed planning requirements and underscores the broad power that regional examiners have to reject such plans or insist on modifications in the name of safety and soundness. For example, in addition to the already extensive list of criteria that credit unions must submit with their capital plans pursuant to Section 701.34, NCUA sites its “implicit” safety and soundness authority pursuant to put credit unions on notice that it can demand that they provide information over and above that which is mandated by the regulations. For example, “the NCUA expects LICUs to provide supporting due diligence documentation that adequately captures all aspects of the financial strategies associated with the deployment of secondary capital in the plan.”

Another striking part of the guidance is the tone it takes regarding the oversight of credit unions that are state charters. The guidance makes clear that NCUA feels it owes no deference to the determinations of State regulators regarding a state chartered credit unions’ secondary capital plan. That means that at least with regard to secondary capital, the common notion that state chartered regulators are the primary regulators of a state-chartered institution is farcical. One more thing, now that I am on a roll. This is the first example I’ve seen in a while that is so detailed and descriptive that it amounts to a de factor amendment of existing regulation. This is precisely the type of change that should be subject to a notice and comment period. The fact that it is not demonstrates that the Administrative Procedures Act needs to be amended.

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NCUA Board Approves Important Changes Three Things You Need to Know about What’s Going on in D.C.

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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