NCUA Proposes Major Rule for Expanded Use of Subordinated Debt

January 24, 2020 at 9:51 am Leave a comment

After almost five years of research, NCUA has released proposed regulations which would allow some credit unions to offer “subordinated debt” as a means of meeting regulatory requirements. Whether or not the proposal was worth the wait will become clear in the coming days as the industry takes the time to digest all 277 pages of it.

At first glance, the biggest winners seem to be complex credit unions that do not have low income designations. Currently, these institutions don’t qualify for secondary capital. Under the proposal, these larger institutions will be able to use this subordinated debt for purposes of meeting their risk based capital requirements.

Under existing regulations, low-income credit unions currently qualify for secondary capital. These institutions will be eligible to receive subordinated debt with their existing secondary capital grandfathered in, provided the credit union complies with parameters set forth in the proposal.

This means that if your credit union is not a complex or low income credit union, you will be ineligible to receive subordinated debt. Remember, credit unions in this category are currently not eligible to receive secondary capital.

Under the plan, NCUA stipulates that in order to qualify to issue subordinated debt, the debt must:

  • Be in the form of a written, unconditional promise to pay on a specified date a sum certain in money in return for adequate consideration in money;
  • Have, at the time of issuance, a fixed stated maturity of at least five years and not more than 20 years from issuance. The stated maturity of the Subordinated Debt Note may not reset and may not contain an option to extend the maturity; and
  • Be properly characterized as debt in accordance with U.S. GAAP.

Not surprisingly, this complicated framework would create more work for lawyers as the subordinated debt would be classified as a security, triggering additional disclosure requirements.

The new subordinated debt classification will replace the existing secondary capital regulations, allowing those of you who already had secondary capital to continue using it so long as you meet the newly proposed requirements found in the regulation. Take a look at page 262 to get a sense of the additional requirements.

Expect much more to come on this in the near future. Remember, these are proposed rules, so submitting comments on this proposal is absolutely critical.

DFS Extends Libor Plan Grace Period

Good news, people. New York’s Department of Financial Services has extended the deadline for which it will accept an institution’s post-Libor preparedness plan from February 7, 2020 until March 23, 2020. Keep in mind that this only applies to state chartered institutions, but NCUA expects federal credit unions to be able to be preparing for the post-Libor world.

Entry filed under: Compliance, New York State, 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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