NCUA is doing the right thing when it comes to assessments

September 24, 2020 at 9:36 am Leave a comment

As blog followers know, there are occasions when I like to remind everyone that the opinions I express are mine and mine alone. This is one of those times.

The NCUA Board has created a low-level stir within the industry by suggesting at its meeting last week that it may have to seek an assessment from credit unions to make up for shortfalls in the share insurance fund caused by the sudden infusion of deposits triggered by the pandemic. NAFCU even wrote this letter to the Board urging it to hold off on any assessments and instead consider increasing the range of investments that credit unions are allowed to make. 

In fact, the Board did exactly the right thing by publicly discussing the share insurance fund. Credit unions should hope for the best but prepare for the worst, and begin preparing now for an assessment in the coming months. 

First let’s make sure we’re all on the same page. As a matter of federal law, NCUA must impose a restoration plan if the equity ratio falls below 1.20%. Federal law also permits NCUA to establish a Normal Operating Level of between 1.20 and 1.50. 

The facts don’t lie. According to the NCUA, the Share Insurance Fund equity ratio has dropped to 1.22% as of June 2020. The primary reason for this sharp decrease has of course been an almost 13% growth in insured shares. The current ratio is well below the NCUA’s Normal Operating Level of 1.38%. But the numbers aren’t as bleak as they first appear. In October, the fund will receive an infusion of $1.5 billion from insured credit unions as part of their annual contributions. 

Strip away the numbers and what you have is yet another debate over just how long lasting the economic downturn is going to be. If you believe that the indestructible mortgage industry is going to continue to rumble along, that the unemployment numbers will continue to defy conventional wisdom and continue to decrease, and that members will be well positioned to pay back forbearances as a vaccine replaces the new normal with a real normal, then it makes sense for NCUA not to prematurely impose additional assessments. 

In contrast, if you are inclined to believe, as many officials at the Federal Reserve are, that the economy will peter out without further congressional stimulus, that a sizable number of forbearances will never be repaid, and that we may very well see a second wave of COVID economic lockdowns in the coming months, then NCUA would be derelict in it’s duty not to protect the share insurance fund. Incidentally, the FDIC has already had to impose a restoration plan on banks.  

Entry filed under: COVID-19, Economy, 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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