Posts tagged ‘complex credit unions’

If Your Credit Union’s Asset Size Is Between $50M & $500M, I Have Some Good and Bad News For You

 Good morning folks.  Thursday is the deadline for commenting on the first of several proposals dealing with various aspects of NCUA’s risk based net-worth requirements with which NCUA will be grappling in the coming months.  Trust me, I know there are better things to think about on a beautiful spring day than the arcane nuances of capital requirements, but the sense I get is that the industry has not focused as much attention on this key operational issue, even though for many CU’s it will have as big an impact if not bigger than the dreaded CECL.

12 USCA § 1790d has long required “complex” credit unions to satisfy Risk-Based Net Worth (RBNW) requirements in addition to the traditional Prompt Corrective Action to which all credit unions are subject.  This RBNW requirement applies to credit unions with $50M or more in assets.  Easy enough. 

As many of you know, for more than half a decade now, NCUA has debated augmenting this requirement with a Risk Based Capital (RBC) requirement. However, the board’s unease with this new framework has resulted in several tweaks and postponements.  Specifically in 2018 the NCUA decide to raise the RBC compliance threshold to $500M.  It also has postponed the effective date of the RBC framework until January 1, 2022. 

With the pending proposal that is out for comment until Thursday, NCUA is now raising the threshold for compliance with the erstwhile RBNW threshold from $50M to $500M.  Specifically, the proposed rule would provide that any risk-based net worth requirement will only be applicable to credit unions with quarter end assets in excess of $500M and a risk-based net worth requirement that exceeds 6%. 

NCUA is proposing this change in the context of its efforts to give credit unions more flexibility to deal with the impact that COVID-19 has had on capital.  For instance, in last Thursday’s board meeting, it proposed changing the date for determining if a credit union has exceeded $10B in assets and therefore must comply with NCUA’s stressed test requirements. 

But with or without the pandemic, raising the compliance threshold to $500M also reflects the reality of just how quickly the credit union industry is consolidating, a trend which has been exacerbated by the pandemic. According to the NCUA as of September 30, 2020 credit unions with assets between $50M and $500M account for 15.9% of industry assets and 33.8% of credit unions. The average asset size of a credit union in this cohort is $164M. Conversely, credit unions with assets greater than $500M account for 81.6% of industry assets and only 12.4% of total credit unions. 

In the meantime the NCUA has put out for comment suggested changes to its risk based capital requirements and expanded the use of subordinated debt for credit unions that will have to satisfy RBC requirements.  Yours truly remains convinced that the Board has never made a truly convincing argument for why this extensive new framework has to be put in place in the first place.  Maybe a new board will consider scraping the RBC framework all together. 

March 23, 2021 at 10:09 am 1 comment

NCUA Proposes Major Rule for Expanded Use of Subordinated Debt

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.

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

Upon Further Review, The Lawsuit Stands

With apologies to those of you who have the temerity to consider football boring, yesterday afternoon the credit union industry was granted the legal equivalent of a referee reversing his call based on an instant replay review. Not just any ruling, instead of the game being over, NCUA can continue to fight to reclaim funds on behalf of credit unions.

Specifically, I am referring to a ruling by the Court of Appeals for the 10th Circuit which revived a lawsuit NCUA brought against Barclays Capital, Inc. seeking more than half a billion dollars for the role it played in issuing mortgage-backed securities sold to the now defunct U.S. Central Federal Credit Union and Western Corporate Federal Credit Union. NCUA is essentially claiming that the bank violated security laws by failing to accurately disclose the quality of mortgages in mortgage-backed-securities purchased by these entities. As you all remember, these and other securities tumbled in value in less time than it took House Republicans to demonstrate that they still don’t know how to govern.

If successful, NCUA would use these funds to offset credit union premiums paid into the Temporary Credit Union Stabilization Fund. All this is a rather long winded way of saying that the success of this and other lawsuits could directly impact your credit union’s bottom line.

Things looked bleak for the home team until recently. Barlays successfully argued in federal district court in Kansas that NCUA waited too long to bring its lawsuit. The court ruled that NCUA only had three years from the date it was appointed Conservator in 2009 to bring a lawsuit. Yesterday’s ruling reverses that decision. It increases the likelihood that, barring a successful appeal by the bank to the Supreme Court, Barclays will ultimately agree to settle up with NCUA.

I’ll save you most of the gory legal details – if you really want to know the difference between a statute of limitations and a statute of repose, I’ve included a link to the decision. Suffice it to say that NCUA’s lawsuit was saved because the court ruled that Barclays lawyers had to honor a pledge not to challenge NCUA’s right to bring the lawsuit after three years had passed.

What is a Complex Credit Union, Anyway?

In its revised Risk-Based Capital Proposal, NCUA broached the idea that more than asset size be used to determine whether a credit union is complex and therefore should be subject to the enhanced RBC framework. I’ve always been frustrated that the industry throws around terms such as systemic risk without actually trying to define what that means in the context of the credit union industry. In her speech last night, Federal Reserve Board Chair Janet Yellen provided an overview of the Fed’s efforts to regulate the truly systemically important financial institutions. She defined large institutions for regulatory purposes very simply as “those firms whose distress would pose significant risk to financial stability.”

Why do I like this definition? Because NCUA has implicitly decided to define financial risk as any risk that could cause a loss to the Share Insurance Fund. In contrast, if it only concentrated on the relative handful of credit unions whose downfall could materially impact the entire industry, an RBC framework could be devised with a much higher compliance threshold, a much more sophisticated RBC framework, and potentially greater flexibility for the credit unions subject to its oversight. I know this won’t happen, but hey, I can dream.

Sign Up Time for the J. Mark McWatters Show

For those of you who want to take advantage of NCUA’s decision to enter the 21st Century and simulcast its board meetings over the Internet, NCUA has posted a sign up link for the March Board Meeting to its website. Given the combative stance taken by newest board member McWatters, this might actually be entertaining. I’m actually considering pitching a Cross-Fire like show to CSPAN that would feature the arch-conservative McWatters debating financial regulation with everyone favorite bank-bashing liberal, Massachusetts Senator Elizabeth Warren or maybe a “Big Brother” show in which the two have to live in the same house with each other and debate the morning news over breakfast. For the political geek set, this could be reality TV at its best.

Enjoy your day, they tell me that the weather is supposed to get nice any day now.

March 4, 2015 at 8:22 am Leave a comment


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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