WASHINGTON and ARLINGTON, Va. - With NCUA's final prompt corrective action (PCA) and proposed risk-based net worth requirements rules now on the street (CU Times, February 9), the much-anticipated, "tripwire" safety and soundness regimens are getting a good looking-over by gaggles of avid analysts from trade association experts here to CU end-users throughout the country.
And although it is still too early to expect anything other than a mixed and tentative reaction to developments of such technical import to credit unions, early reports seem to indicate that NCUA is at least getting an "A" for effort in making the H.R. 1151-mandated, bank-like net worth surveillance systems as palatable as possible.
"Considering where NCUA started on both the main regulation and the proposal for complex credit unions, we have seen substantial improvement," stated CUNA Senior Vice President, Regulatory Advocacy Mary Dunn.
"However, we also know that we're not the ones who have to live with this. It is the credit unions that have to operate now under PCA," Dunn added, noting that a CUNA subcommittee would be monitoring implementation-especially with respect to rapidly growing CUs-and making suggestions.
In doling out qualified plaudits to NCUA over its efforts Dunn, however, touted the fact that several CUNA recommendations had found there way into PCA's final rule.
They were: curtailment of agency discretionary actions against "undercapitalized" CUs between 5% and 5.99% net worth; acknowledgement of a possible role for secondary capital (uninsured deposits counted as a form of capital); a quarterly rather than a monthly PCA reporting schedule; the establishment of an ongoing PCA task force to review rule implementation; and the availability of NCUA's ombudsman for CUs appealing either the imposition of a discretionary action or the type of action levied.
"It may be that with the way NCUA has established the final rule and also the direction that it's heading with the complex rule," conceded Dunn, "that credit unions may not feel under such pressure that we need to go to Congress. But, if we do, we definitely are willing to pursue that course of action, if necessary."
And, with respect to NCUA's proposed risk-based net worth and CU "complexity" rule, Dunn said she also wanted "to congratulate" the agency for striving to strike the delicate balance between simplicity of determination and flexibility of application for the diverse world of CUs.
"NCUA has, I think, made certainly a reasonable effort to look at how you can go about defining complexity and then figuring out what your risk-based requirements are," she said.
"It is possible that an adequately capitalized credit union," Dunn explained, "even though it is `complex,' would not have any additional risk-based requirements. And I think that is a tremendous step forward in the right direction."
Dunn, however, also conceded CUNA had some reservations about the definitions and weights assigned to various portfolio factors constituting credit union "complexity" and its risk-based requirements.
One such definition, she said, had to do with long-term real estate loans being considered as anything in excess of three years maturity.
"I think that is a short time frame for a real estate loan," Dunn said. "Investments likewise-investments that have maturities of three years or longer. I think that is an area where we can go back to NCUA and say, `Hey...instruments with these short maturities we don't really think pose that much risk to the share insurance fund, and probably shouldn't be the subject of additional risk-based requirements.' "
NAFCU, on the other hand, was not quite as impressed as CUNA with NCUA's efforts.
In one of his first public announcements on the job, NAFCU President Fred Becker Jr. said he had "serious concerns" about the proposed rule and indicated that the risk-based net worth requirements and even basic PCA may be more complex and difficult to apply than necessary.
However, in a February 8 teleconference on the subject, NCUA General Counsel Bob Fenner and agency Trial Attorney Steve Widerman told NAFCU members that the agency had striven in the rule-making to balance pertinent statutory requirements and the needs of credit unions for simplicity and flexibility.
After a Fenner overview, Widerman outlined the four mandatory supervisory actions (a quarterly .1% of assets reserving requirement from earnings to build net worth; a qualified restriction on asset growth pending approval of a net worth restoration plan; a member business lending limit, and the submission of a net worth restoration plan) NCUA must take when federally insured credit unions fall below 6% net worth (the reserving requirement also applies to "adequately" capitalized CUs), but added that the agency had provided four different methods of calculating CU asset size (CU Times, February 9).
He also noted that if a credit union is "undercapitalized" but within the 5-5.99% net worth category-and in compliance with the mandatory supervisory actions-it is "completely" exempt from any discretionary supervisory actions.
With regard to the agency's proposed risk-based net worth rule Widerman observed that quarterly filers would have to calculate requirements quarterly but-unlike in basic PCA-semi-annual filers only had to determine requirements semi-annually. He also noted that "adequately" capitalized "complex" CUs, not in compliance with risk-based requirements, will fall into the "undercapitalized" category-but to the more lenient, upper "tier" (5-5.99%) of that category.
"Based upon our initial review of the final rule on prompt corrective action," observed NAFCU economist Lisa Ryu, "our impression is that it had significant improvements over the proposed rule in the sense that it had lots of flexibility built into the final rule."
Ryu pointed out, however, that she also had reservations about the three-year maturity trigger on the long-term real estate loan determinant of CU "complexity"-given that this would include a whole range of "adjustable loans and home equity mortgage loans." Offsetting this, she said, would make for a "perverse incentive" of decreasing interest rate risk through term reductions while increasing other forms of portfolio risk.
Ryu also noted that NAFCU had problems with NCUA's member business lending and long-term investments determinant categories of CU complexity.
Ryu concluded by saying that, of the approximately 1,490 credit unions estimated under NCUA's proposed rule to be "complex," 204 would be under $2 million in assets and 177 of those would be "complex" as a result of long-term investments. She also said that 44% of all "complex" CUs would be so defined because of long-term real estate loans and 55% would be "complex" because of long-term investments.
Ryu also revealed that, according to her calculations, about half of all "complex" CUs under the proposed rule would actually have risk-based requirements under 6%-an amount, she said, which brought into question the CUs' "complexity" in the first place.
Widerman said he would look into Ryu's findings. -
gmcorrigan@mindspring.com
