Posts tagged ‘RBC’

Are you ready to comply with federal securities law?

There is much more in NCUA’s proposal to update the use of secondary capital by credit unions than meets the eye. If the regulation is finally promulgated as is, it will aid complex credit unions which will be able to use subordinated debt to satisfy their very unique risk-based capital requirements. The problem is that the regulation will make it much more difficult and cumbersome for low income credit unions to utilize this option to comply with their own net worth requirements, and to use secondary capital as part of their strategic development plans. In the blog, I continue to refer to secondary capital, but if this regulation is finalized, it will be referred to as subordinated debt.

Why are these new changes going to have such an impact? Because NCUA unequivocally has determined that what we currently refer to as secondary capital is, for legal purposes, a security instrument under state and federal law. As a result, in the preamble the Board “emphasizes that any issuance of a Subordinated Debt Note by an Issuing Credit Union must be done in accordance with applicable federal and state securities laws. Given the complexity of the securities law framework, any credit union contemplating an offer and sale of Subordinated Debt Notes needs to engage qualified legal counsel to ensure its compliance with securities laws before, during, and after any such offer and sale.”

If this sounds complicated, it is. There are about 15 blogs I could do on the topic, but as a preview of what this means, going forward, when you issue subordinated debt, NCUA expects your credit union to “prepare and deliver an Offering Document to potential investors even though there are no SEC-mandated disclosure requirements for offerings of securities pursuant to the Section 3(a)(5) exemption, and there generally are no SEC-mandated disclosure requirements for offerings of securities pursuant to the Rule 506 private placement exemption as long as all purchasers in the offering are ‘accredited investors.’” Needless to say, you’re going to have to retain the services of a lawyer who specializes in securities law, and probably an accountant who does as well. In addition, this goes well beyond the scope of knowledge of even our most savvy compliance people.

The good news is that none of this applies to credit unions that currently hold secondary capital. The bad news is that it does apply to any credit union that seeks out secondary capital in the future. For larger credit unions which have to comply with the risk based capital requirements, which take effect in 2022, the expense may be worth it, but my concern is that for the vast majority of low income credit unions which have traditionally used secondary capital to satisfy net worth requirements, the cost will be too great. Cynics will say that this outcome will be just fine with NCUA, which has grown increasingly skittish about the way some credit unions are using secondary capital. At the very least, this represents a big change for credit unions, and the industry should start thinking about creative ways it can cost-effectively address some of the issues raised by NCUA in a way that allows low income credit unions cost-effective access to this resource. After all, for almost 25 years, NCUA has apparently allowed credit unions to access secondary capital in violation of federal securities law.


February 6, 2020 at 9:11 am Leave a comment

A Thursday Morning Hodgepodge

Believe it or not, Christmas is only a week and a half away. Today’s news has me thinking that a lot of policymakers want to clean off their desks before they take their long winter naps.

NCUA to Consider RBC Compliance Extension

The NCUA Board holds its last meeting of the year today. Among the issues to be discussed is a final rule on risk-based capital. In July, NCUA proposed a second extension of its risk-based capital rule to January 2022. During this time, the NCUA Board will be further analyzing additional changes to the RBC rule, as well as considering the extent to which supplemental capital could be used to satisfy RBC requirements. This further delay is an addition to the NCUA’s earlier decision to raise the threshold level for RBC compliance from $100 million to $500 million. Why doesn’t NCUA just admit that the whole RBC idea was fatally flawed and scrap the whole thing?

CFPB Director Looks Back on First Year in Office

CFPB’s Director Kathy Kraninger used an opportunity before the National Association of Attorneys General to reflect on her first year and comment on some pending big-ticket items. She indicated that while her mind is still open to suggestions, the CFPB is taking a serious look at changing the payday lender regulations finalized in the closing days of the Cordray reign by scrapping the requirement that payday loans be subject to underwriting requirements. Keeping in mind that this is one man’s opinion, for you fans of the Cordray administration, you have to admit that Kraninger has been a refreshing change from the interim oversight of her former boss Mick Mulvaney. Let’s face it; it was always strange to have someone vehemently opposed to a Bureau to be in charge of it. As for us more moderate types, Kraninger has struck the appropriate balance between enforcement, regulation and common sense, which means that she hasn’t ignored the potentially negative impacts of well-intended regulations. I’m sure she is ecstatic to know that I have given her my stamp of approval.

NY Senate Republicans Dropping Like Flies

It was Watergate that condemned New York’s Assembly Republicans to permanent minority status, and it increasingly appears as if the election of Donald Trump will be dagger in the heart of the New York State Senate Republicans, at least if they ever thought they would have a chance of once again being in the majority. As of my last count, we are now up to as many as eight Republicans who have announced they either will not run for reelection or seek other seats. This is an amazing turnaround for an institution which not long ago was the best place for a Republican to be, short of statewide office.

The latest longtime senator to announce his departure is none other than Joe Robach of Rochester. He joins North Country’s Betty Little, Western New York Senator Michael Razenhofer and the Capital Region’s Joe Amedore. In addition, freshman Central New York Senator Bob Antonacci jumped ship and secured a judgeship. Further, Senators Chris Jacobs and Rob Ortt are both running for Congress. Remember folks, this is on top of the fact that the GOP is already down to 23 senators. The recent wave of retirements raises the real possibility that the Senate democrats will join the Assembly democrats in having supermajority control in both chambers. This may not seem like a big deal, but it gives the legislative leaders that much more leverage in negotiating against governors when they know they can override vetoes in a worst-case scenario.

December 12, 2019 at 8:55 am Leave a comment

Banks Take Second Look At RBC Requirements; So Should Credit Unions

Yesterday, the FDIC, the Federal Reserve Board and the OCC released a technical proposal that could indirectly help credit unions by buttoning the case for further reducing the number of credit unions slated to be subject to NCUA’s risk based capital rules.

Starting on January 1, 2019, credit unions with 100 million or more assets have to comply with the risk based capital requirements. NCUA implemented these more complex requirements in reaction to a series of similar reforms undertaken by the larger banking industry. Since 2013, banking regulators have been phasing in new risk grading requirements. For example, starting on January 1, 2018, there are scheduled to be new limits placed on the amount of mortgage servicing assets that can count towards an organization’s risk based capital requirements. Tuesday’s announcement is the latest and strongest signal that risk based capital requirements will be scaled back for smaller institutions.

Why does this matter you ask? Because Chairman McWatters has in the previously expressed skepticism about the utility of NCUA’s risk based capital requirements. Furthermore, NCUA originally argued that it had to make these proposed changes because the capital requirements of “complex” credit unions have to be similar to the same requirements imposed on banks. Yours truly has always argued that RBC requirements should only be imposed on the largest of institutions. Hopefully we will see further changes in NCUA’s regulations before they take effect.

August 23, 2017 at 8:56 am Leave a comment

NCUA Urged to Focus on IRR

Just in time for the FED’s raising of interest rates, NCUA’s Office of Inspector General (OIG) has concluded that interest rate sensitivity should be separately assessed and graded as part of the examination process.

Currently NCUA is alone among the major federal regulators in using a CAMEL system that doesn’t separately rate an institution’s sensitivity to interest rate risk. Instead, NCUA has always assessed sensitivity as part of its assessment of a credit union’s liquidity. While generally being highly complimentary of NCUA’s ongoing efforts to guard against interest rate risk, the Inspector General is concerned that “NCUA may not be effectively capturing IRR when assigning a composite CAMEL rating to a credit union.” According to the report, “this occurs because NCUA assesses sensitivity to market risk and liquidity under the L in the CAMEL rating system,” which may understate or obscure the level of a credit union’s risk.

The OIG’s recommendation is consistent with the direction in which NCUA has headed. For instance, credit unions with $50 million or more in assets are already required to have IRR policies and procedures. Furthermore, while it agreed to remove interest rate risk as a consideration in the new Risk-Based Capital Framework, it stressed that it would be releasing detailed guidance related to IRR management.

I have talked about this issue with some of my more faithful readers in the past and I can hear the groans already. I agree with you that NCUA’s emphasis on IRR for the past several years has bordered on counterproductive paranoia. That being said, this is a proposal that makes sense. Let’s face it, interest rate risk is too important an area not to be subject to a clear-cut examiner evaluation.

On that note, enjoy your weekend.

December 4, 2015 at 8:25 am Leave a comment

What a new comment period means for RBC reform

Yesterday’s announcement by NCUA Chairman Debbie Matz that NCUA would Issue an amended Risk Based Capital Proposal and that credit unions would be given an additional comment period to respond to it has several important implications .

— The most important statement yesterday was not Chairman Matz’s but Vice Chairman Rick Metsger’s “As I have often said, I believe interest rate risk is important and must be addressed in the risk-based capital rule, but it should be addressed separately from credit risk. Weighting credit risk and interest rate risk with a single numerical value created conflicts that ultimately made it difficult to accurately weigh the risk of either.”

This is absolutely crucial news since many of the most onerous risk weightings, most notably dealing with mortgage concentrations, were designed to avoid interest rate risk by deterring credit union’s from holding otherwise sound financial products. NCUA tried to accomplish with a hatchet a goal for which it needed a surgeon’s knife. Hopefully its proposed revisions will provide a more nuanced approach to interest rate risk and risk-based capital.

— Chairman Matz has been about as reluctant to extend the comment period for risk-based capital regulations as the Patriots are to show up for practice this morning after getting destroyed by the Kansas City Chiefs last night. I thought it was telling that Chairman Matz said she made the decision in consultation with NCUA’s lawyer’s (Whenever you have to do something you don’t want to do it’s always convenient to blame the lawyers).

Under the Administrative Procedures Act, an agency may promulgate a final rule that differs from the rule it has proposed without first soliciting further comments if the final rule is a “logical outgrowth” of the proposal (Louisiana Fed. Land Bank Ass’n, FLCA v. Farm Credit Admin., 336 F.3d 1075, 1081 (D.C. Cir. 2003).   It’s safe to assume that NCUA’s proposal will contain some really big changes.

— Chairman Matz is no longer driving the bus when it comes to RBC reform. Not only did Board member Metzger apparently already secure changes he wanted to the RBC proposal but the newest Board member c J. Mark McWatters  has some serious doubts about the regulation. He issued a separate statement yesterday in which he explained that “the previously proposed risk-based capital rules are deeply flawed and merit substantial revision. The devil is in the details, and I await the details before I can pass judgment on the next draft of the proposed rules.”

— I’ve consistently said that one of the major problems with NCUA’s proposal is that it inadequately explained the rationale behind many of its individual provisions. NCUA should use this new round of proposed rule making to explain in greater detail why it decided on the weightings that it ultimately is proposing. There are times that regulations should be long and complicated because they deal with long and complicated issues: this is one of those times. The initial proposal was presented in such a cursory manner that a review of the proposal and its preamble, and nothing else, leads to the conclusion, rightly or wrongly, that NCUA didn’t know what it was doing.

— The process is by no means over.  Depending on how the second proposal Is drafted there are still legitimate legal questions as to whether NCUA is overstepping its authority and whether credit unions should do something about this.

— Comment letters matter. As someone whose job is dedicated in part to getting credit unions to respond to proposed regulations and not simply complain about implementing them once they are promulgated, NCUA’s decision provides the best example yet of how responding to regulations with a large volume of thoughtful critiques can and does influence the regulatory process. NCUA would not be announcing a new round of propose regulations but for the fact that credit unions showed how flawed its initial proposal was.

Lawsky comments on role of regulators

Benjamin Lawsky, the Superintendent of New York State’s Department of Financial Services, had some very provocative thoughts about regulation at a recent forum hosted by Bloomberg News. He said that what has surprised him the most about financial misconduct since he has been Superintendent is that the misconduct “doesn’t go away.” As a result, regulators have to look in the mirror and ask themselves if they are going about deterring misconduct the right way.

He suggests that instead of focusing so much on corporate misconduct greater emphasis should be placed on holding the individuals behind the misconduct responsible.

If he is right than big fines are a start but unless you couple them with sanctions against the individuals driving the misconduct than they will continue to be viewed as a cost of doing business.

Here is a link to the interview.  The portion to which I am referring starts at 2:10.

September 30, 2014 at 9:02 am Leave a comment

A Gimmick Worth Using

Kudos to Nicholas Ballasy of CU Times for getting to the heart of the matter in his video interview with Chairman Matz regarding why she has rejected calls from the trades for extending the comment period for the Risk Based Capital proposal. When she described the proposal as a “gimmick” and “delaying tactic,” he followed up by asking her if the three listening sessions she will be holding across the country will be part of the official comment period record. The answer: No, because under the Administrative Procedures Act evidence can’t be added once the comment period has ended.

Say What? Doesn’t that suggest that, given this very unique set of circumstances, an extension of the comment period would be more than a gimmick? If NCUA can’t legally take the comments it gathers from its listening sessions into account, then why is it having them? Either NCUA is going to take into account the comments and concerns of credit unions, or it is not.

I think having a public dialogue on this proposal is a great idea. This is the type of regulation that everyone says they agree with in theory. What a true dialogue could do is make people realize that there are trade-offs in proposals like this. Not every credit union is going to be a winner. There is some give and take that simply can’t be reflected in comment letters, as important as they are.

So, why not make these meetings part of the official record? I believe Chairman Matz is committed to making this the best proposal possible. Why not all work from the same public record when it comes to determining which risk-based capital framework is most appropriate for credit unions?

Even if some credit unions are simply looking to delay the inevitable, it’s also true that NCUA’s rushing to implement a Basel framework that has been designed and debated for decades by banks and doesn’t cleanly fit the credit union model. Making sure that all the evidence is used to make this proposal as good as possible is in everyone’s interest. I imagine I am solidly in the majority when I say I’d rather have a proposal take a bit more time to implement if it results in a better product.


April 28, 2014 at 9:04 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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