Secondary Capital and its Limits

November 18, 2019 at 9:40 am Leave a comment

At first, it surprised me that NCUA’s denial of credit union secondary capital plans was the issue most frequently being appealed under NCUA’s new regulatory appeals process. However, as I read these decisions and studied the history behind secondary capital, the increasing frustration on the part of credit unions stemmed from NCUA’s contradictory policy goals and legal interpretations.

Since 1996, 12 CFR 701.34(b) has permitted low income credit unions to accept uninsured secondary capital (61 FR 3788-01). As originally envisioned by NCUA, the regulation permitted these credit unions to raise secondary capital from “foundations and other philanthropic institutions.” NCUA hoped that this credit would help credit unions “make more loans and improve financial services” for low income communities. The original rule simply required credit unions to notify NCUA that they were going to accept this capital. Fast forward to 2006, and NCUA was already getting gun shy about this power. Under revisions to 701.34(b), credit unions were required to get pre-approval for the use of secondary capital. NCUA accomplished this goal by requiring credit unions to address five criteria in their secondary capital plans.

Against this backdrop, the legal issue with which NCUA and credit unions are grappling is the extent to which the five criteria outlined are simply the baseline of regulatory requirements for secondary capital plans, or if they are instead representative of the totality of what is required of a credit union seeking to take in secondary capital. There is also one other issue lurking right below the surface. Even assuming that NCUA can, for safety and soundness reasons, insist that credit unions provide more detailed information than required under a plain reading of the regulation, is there a point where its application of safety and soundness considerations becomes unreasonable?

In my ever so humble opinion, it’s no coincidence that NCUA released a detailed guidance to examiners explaining how to assess secondary capital requests. It’s exactly the type of document I would come out with if I wanted to show that secondary capital determinations were not arbitrary and capricious.

What really has me fired up, however, is that NCUA’s stringent legal interpretation of its examination powers is inconsistent with its stated policy goals. I have a pretty good memory, and I could swear it wasn’t too long ago that then-Chairman Debbie Matz was encouraging qualifying credit unions to get their low-income designations in part to make them eligible to take in secondary capital. I have made that suggestion to credit unions myself. It is no wonder, then, that credit unions are confused that NCUA is effectively discouraging the credit unions that could use secondary capital the most from getting it in the first place. Simply put, the requirements for secondary capital approval have become so arbitrary, expansive and time-consuming that many credit unions won’t have the resources to get the plan approved in the first place. If this is NCUA’s goal, then it should simply say so. If not, then it has to clarify its expectations both internally and for credit unions as a whole.


Entry filed under: Compliance, General, Regulatory. Tags: , , , .

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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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