The National Credit Union Administration (NCUA) held a board meeting Thursday May 19. Here are the issues that were addressed with greater detail below: •
A proposed voluntary program to allow credit unions to prepay their Temporary Corporate Credit Union Stabilization Fund Assessments
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A final rule on golden parachutes and indemnification payments to key credit union personnel
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A final rule revising provisions of NCUA’s official advertising statement rule
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A final rule on temporary unlimited National Credit Union Share Insurance for non-interest-bearing transaction accounts
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A proposed rule on the Community Development Revolving Loan Fund
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Reports on the National Credit Union Share Insurance Fund (NCUSIF) and the TCCUSF
Voluntary Prepayment of Corporate CU Fund Assessments The NCUA announced that hypothetically this year’s corporate stabilization will likely be around 25 basis points of insured shares, and next year’s will likely be around 13 bp. This is NOT because of any increase in expected losses on the assets held in the corporate stabilization fund. Rather, it is because the total of around $8.5 billion of obligations of the fund exceeds the $6 billion line of credit from Treasury that is being used to spread the stabilization fund costs over eleven years. The agency has decided to keep $0.5 billion of the Treasury line unused, in reserve. Therefore, unless loss estimates change in the future (and they could change in either direction) credit union assessments will have to amount to around $3 billion over the next two years (an average of $1.5 billion a year), and $5.5 billion over the following 9 years (an average of about $660 million a year). CUNA and the LSCU have been aware of the liquidity issues facing the stabilization fund (basically, there are over $8 billion of losses to spread over 11 years, but only $6 billion available from Treasury, requiring “frontloading” some of the assessments). Because it is a liquidity rather than a loss issue, CUNA, the LSCU, and credit unions have urged the NCUA to collect the larger early-year assessments on a prepaid basis, providing the extra cash the corporate stabilization needs in the first few years, but allowing the expensing of the assessments on a more even basis over the full eleven years of the stabilization fund’s life. The NCUA reported that according to its analysis, the Federal Credit Union Act does not allow the agency to charge a mandatory prepaid assessment to all credit 1
unions. However, the NCUA has developed a plan to allow credit unions to prepay some of their corporate stabilization assessments on a voluntary basis. The crux of this proposal is as follows: •
To the extent there is voluntary participation in the prepaid assessment program, there will be a reduction in the assessments all credit unions will be required to pay in 2011 and 2012
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Subject to some limitations, NCUA will permit a credit union to prepay corporate stabilization assessments by up to 36 basis points of insured shares this year. The minimum amount that a credit union could advance would be $10,000
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These prepayments would then become an “account” (a prepaid asset) from which actual assessments in 2013 and 2014 and later could be paid. These prepayments would essentially amount to interest free loans to the Stabilization Fund, and would reduce the size of the required assessments in 2011 and 2012. Also, the prepayments would be an asset purchase rather than an expense, and would not be expensed until used to cover assessments in 2013 and beyond. NCUA will solicit interest by credit unions in the program before finalizing it. If “subscriptions” by credit unions total less than $300 million, the program will not be implemented
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CUNA estimates that if all eligible credit unions participate to the maximum extent permitted, the 2011 assessment to all credit unions would be around 10 basis points instead of 25 bp. Next year’s assessment would likely be around 10 bp instead of 13 bp. Subsequent assessments would likely be around 9 bp and would gradually decline as total insured shares in credit unions grow. Again, this assumes no change in the expected losses on the legacy asset portfolios over the life of the program and using the full 11 years of the stabilization fund to cover the costs
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Participation by any credit union would essentially involve granting the corporate stabilization fund an interest free loan for a few years. At current interest rates, there would not be substantial opportunity costs, but rates could be higher in the future
Meanwhile, the NCUA is seeking comments regarding the program. More specifically, the agency is urging credit unions to let them know: whether credit unions are willing to participate in the program; suggestions for improvements; accounting considerations; and any public policy concerns.
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CUNA and the LSCU commend the agency for putting forward a proposal on prepayments for consideration by the credit union system. We will be providing more information and guidance to credit unions on how the prepayment plan would work and soliciting comments from credit unions on improvements and concerns. We understand that NCUA will be holding a webinar next week on the proposal and it will provide information on that shortly. Credit unions are urged to review NCUA’s proposal, consider whether they want to support the program, consider whether revisions are called for and let NCUA know as soon as they can whether the program should be adopted. The LSCU will be developing and distributing a Regulatory Comment Call shortly. Comments to the NCUA should be directed to regcomments@ncua.gov; questions to NCUA should be directed to Wendy Angus, Director of Risk Management, 703-518-6363. Final Rule—Golden Parachutes and Indemnification A final rule on golden parachutes was adopted that prohibits golden parachutes for executives of troubled credit unions. Several clarifications regarding the rule have been made by the agency. It does not apply to “bona fide” deferred compensation plans or “nondiscriminatory” severance pay plans. The agency also clarified that the limitations on Institution Affiliated Party (IAP) indemnification “apply only to administrative actions brought by the NCUA or appropriate state regulator” such as a removal or prohibition administrative proceeding before an Administrative Law Judge. Also, the prohibitions will not retroactively apply to golden parachutes or indemnification clauses in existing IAP employment contracts. They will apply to and may supersede existing FICU indemnification bylaws. The rule defines “golden parachute payment” to mean “any payment or any agreement to make payment in the nature of compensation by any federally insured credit union for the benefit of any current or former IAP . . .” that is contingent on the termination of the IAP’s employment with the FICU when the FICU is rated CAMEL 4 or 5, is insolvent, is an undercapitalized corporate credit union, is a FICU that is subject to a proceeding to terminate share insurance, or is in “otherwise troubled condition” as defined by 12 C.F.R. § 701.14(b)(3), (4). Under the final rule, when the NCUA or a state regulator brings an administrative action against an IAP, prepayment of an IAP’s legal expenses is only permissible if the FICU’s board of directors makes a good faith determination that: (1) the IAP believed that he or she acted consistently with their fiduciary duty, and (2) the payment will not materially adversely affect the FICU’s safety and soundness. The IAP, however, would be required to repay the FICU for those legal expenses unless the IAP was to successfully defend the administrative action again him or her. 3
Prior to prepayment of the IAP’s legal expenses, the IAP must provide the FICU’s board with: (a) a written statement that the IAP believe that he or she acted consistently with his or her fiduciary duty, and (b) a written agreement to reimburse the FICU for the portion of any pre-paid legal expenses that may ultimately become prohibited (e.g., because the Administrative Law Judge at NCUA and/or the NCUA Board ruled against the IAP). A revision to the final rule that was not included in the proposed rule (and wasn’t subject to public notice and comment) will require a credit union’s board to take into account the party’s ability to repay, such as by requiring the party to post collateral. CUNA and the LSCU continue to have concerns about this rule and are requesting NCUA to revisit the rule in one year to assess how it is being implemented. Final Rule—Accuracy of Advertising and Notice of Insured Status The board approved a final rule that will generally require radio and television advertisements for federally insured credit unions to include the phrase “this credit union is federally insured by the National Credit Union Administration.” Federally insured credit unions, at their option, may use the phrase “Federally insured by NCUA” or reproduce NCUA’s official sign instead of using the phrase above. The final rule requires this official advertising statement in all advertisements, including on the cover page of its annual reports and statements of condition, and on its main internet page. Radio and television ads that are less than 15 seconds would be exempted from this requirement (down from under 30 seconds under existing NCUA policy). The final rule also revises the definition of “advertisement” to mean “a commercial message, in any medium that is designed to attract public attention or patronage to a product or business.” In addition, the final rule revising the requirements of the NCUA official advertising statement to “be in a size and print that is clearly legible and may be no smaller than the smallest font used in other portions of the advertisement intended to convey information to the consumer.” Final Rule – Temporary Unlimited Share Insurance to Non-Interest-Bearing Transaction Accounts The NCUA board approved a final rule to implement the Dodd-Frank Act’s temporary unlimited share insurance for non-interest-bearing transaction accounts (i.e. non-dividend-bearing transaction accounts). This temporary unlimited share insurance will continue until December 31, 2012. The temporary unlimited coverage applies only to traditional non-interest-bearing accounts, such as a demand checking or share draft account, whether or not the account is held by an individual or a business, as well as to official checks issued 4
by a FICU such as negotiable cashier’s or certified checks. This temporary unlimited share insurance does not apply to NOW accounts, money-market accounts, or IOLTA accounts. Proposed Rule – Community Development Revolving Loan Fund The board proposed a rule for public notice and comment that would substantially revise the Community Development Revolving Loan Fund (CDRLF) regulation to “improve transparency” and improve the CDRLF’s organization and ease of use by credit unions. While the NCUA said the changes are designed to reduce the burden on credit unions seeking an award from the fund, the proposal would also add new reporting and monitoring requirements. In addition, it would change the CDRLF rule’s low-income credit union (LICU) designation criteria to use “median family income” in the standard for LICU determination instead of “median household income.” NCUSIF and Temporary Corporate CU Stabilization Fund Reports The NCUA’s documentation for its NCUSIF report continues to indicate that the agency is not anticipating a NCUSIF premium for this year, although this issue was not specifically discussed during the meeting. NCUA staff reported that the NCUSIF’s equity ratio was at 1.29 percent as of April 30, 2011. In addition, the NCUA did not write-off any insurance loss expenses for the second month in a row. The NCUSIF’s reserves stand at approximately $1.2 billion. The NCUA reported there are currently 374 CAMEL 4 and 5 credit unions, which represent 4.87 percent of insured shares, or approximately $37 billion. NCUA staff also noted that there are 1794 CAMEL 3 credit unions, which represent 17.27 percent of insured shares, or $131 billion. Combined, insured shares in CAMEL 3, 4, and 5 credit unions represent approximately 22 percent of total insured shares. The TCCUSF reported approximately $7.2 million in earned revenues (such as from “guarantee fee revenue” on NCUA Guaranteed Notes) and $825,293 in operating expenses for the month of April, resulting in an over $6 million dollar surplus from its operations. If you have any questions about the above topics, or other regulatory or compliance questions, contact LSCU VP, Regulatory Affairs Bill Berg at 866.231.0545 ext. 1028 or Director, Compliance Scott Morris at ext. 2165.
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