NCUA acts on risk-based PCA rule, mid-session budget, interest rate ceiling

ALEXANDRIA, Va. - In a busy but power outage-delayed regular meeting July 13, the NCUA Board passed-in unanimous votes-a final rule establishing a risk-based net worth requirement (RBNWR) regimen for federally insured credit unions (FICUs), a mid-session budget that revised downward the agency's $135 million FY 2000 budget by $1.84 million, and a recurring authorization to maintain the FCU interest rate ceiling at 18% through March 8, 2002. In remaining action the board, in 2-1 votes with NCUA Board Chairman Norman D'Amours dissenting, granted community charter conversion applications to Dana Reading FCU of Reading, Pennsylvania and Patriot FCU of Chambersburg, Pennsylvania to serve community FOMs of 356,000 and 280,000 people respectively. In both cases D'Amours-noting, in the instance of Patriot FCU, that the requested FOM would cover three counties-objected to the applications on the basis of extra-official (no longer official board policy) safety and soundness concerns for the 33 total credit unions that would be overlapped by the two new community charters. But NCUA Board members Dennis Dollar-who pointed out that one of the objecting CUs in the Patriot FCU application was itself an area community charter CU-and Yolanda Wheat supported the applications, and the measures passed. In the headliner event of the session, however, all board members were in agreement over the acceptability and importance of NCUA's painstakenly reworked final rule on RBNWR for "complex" credit unions-a subset of the prompt corrective action (PCA) capital surveillance regimen that was also mandated by 1998's CU Membership Access Act (H.R. 1151), released for advance public comment in October 1998, and issued as a proposed rule in February (CU Times, February 9). By the end of the final comment period this spring, a total of 153 comment letters on the RBNWR rule had been vetted by the agency and numerous consultations with trade association representatives undertaken to make the rule as effective and palatable as possible. Responding to H.R. 1151 directive that NCUA design a "risk-based net worth requirement to take account of any material risks against which the net worth ratio required (PCA) for an insured credit union to be adequately capitalized may not provide adequate protection," the board, in its final rule, approved a three-step process that lets a FICU self-determine its RBNWR-applicable status, calculate that exposure, and then avail itself of three RBNWR-reducing alternate calculations and a possible risk-mitigation credit (RMC) that the NCUA Board reserves for FICUs with exceptional risk-management practices. And in one vigorously lobbied revision of the proposal, the final rule simplified the self-determination step to exempt from the rule all FICUs under $10 million in assets and those whose calculated RBNWR is less than 6%. As a result, the new rule's call report data-based RBNWR calculation-which must be reported by over-$50 million-asset FICUs every quarter and by under-$50 million-asset FICUs semiannually (with quarterly reporting optional)-decreased the number of FICUs exposed to RBNWR from 1,408 (13.2% of FICUs) under the proposed rule to approximately 452 (4%), and provided for a further thinning of this group through the use of the "alternate (calculation) components" and the RMC. Additionally, as NCUA stated, with the average RBNWR for the at-risk group being only 6.8%, the number of FICUs projected to fail their RBNWR would be only 17. Specifically, the RBNWR calculation is based on the breakdown of a FICU's overall "portfolios of assets and liabilities" into seven "risk portfolios" (long-term real estate loans, member business loans (MBL), investments, low-risk assets, average risk assets, loans sold with recourse, and unused MBL commitments) and one credit category (allowance for loan loss, up to 1.5% of loans) which are "risk weighted" according to asset/liability type (and a factorial constant) and aggregated to produce the RBNWR-or the amount of net worth the FICU must maintain to stay "adequately capitalized." "Complex" credit unions (or credit unions with "applicable RBNW requirements," as the rule now prefers to call them) failing to meet this minimum RBNWR would fall into an "undercapitalized" net worth category, requiring them to file a net worth restoration plan with NCUA and possibly subjecting them to mandatory and discretionary supervisory actions as well. Embedded in this formulation, however, are numerous relaxations of the proposed rule that were doggedly advocated by the CU trade associations, including: * the extension of long-term real estate loans' maturing or repricing criterion from three to five years; * the elimination of the investment type-blind, three-year rate adjustment period differentiation between long-term and short-term investment categories in favor of one "investments" risk portfolio covering all legal investments and risk weighted by categories or "buckets" that treat "similar investments similarly" by assigning weighted-average life (WAL) values to the buckets according to investment types; * the redefinition of the "low-risk asset" risk portfolio to include only cash on hand (vault, ATM, and teller cash) and the FICU's 1% deposit in the NCUSIF with a risk-weighting of 0%; and the shifting out of such "cash equivalent" assets as demand deposits and short-term investments (under 90 days) at other financial institutions to the investments risk portfolio where it will receive a risk-weighting of 3%; * the elimination from the "loans sold with recourse" risk portfolio of FICU loans sold to secondary market purchasers such as Fannie Mae and Freddie Mac; and * the downplaying of the term "complex credit union" in the rule (it is mentioned only once, to satisfy statutory requirements). "I really think that you have (excelled) on this," D'Amours congratulated agency PCA staff. "This is an extremely difficult task that you have done....to properly tune these parameters of risk basics. It's a very difficult thing to do." Pleased with the RBNWR rule outcome, NAFCU President Fred Becker thanked D'Amours for "listening to our concerns and incorporating them in the final rule." Becker added, "We are pleased to see that the final rule provides a more realistic assessment of a credit union's portfolio risk." Also pleased with the rule but wary of its effect on credit unions specializing in mortgage and member business lending, CUNA President Dan Mica said, "The board today approved a final rule, which represents a dramatic improvement from the proposal. It significantly lightens the regulatory load for a substantial number of credit unions...for which we are grateful." The rule's implementation will be reviewed by the agency's PCA task force in one year's time and its provisions considered for further revision. In its budget action the NCUA Board also elicited the kudos from the trade associations by passing a mid-season fiscal instrument that increased estimates for administrative costs, travel, contracted services, and utilities by $1.5 million but decreased employee pay and benefits estimates by $3.4 million, resulting in a projected FY 2000 savings of $1.84 million. "I deeply regret that there are no funds in here for an increased level of economic development specialists for which there is an enormous need in the small credit union community-and the low-income credit union movement-that is not being addressed," D'Amours stated. "With that regret I am going to support the budget." D'Amours, who had been poised (CU Times, July 18) to submit an amendment requesting the funding of 48 additional economic development specialists (EDSs) for the small credit union program (SCUP), surprised everyone by failing to offer the amendment. Later, in an impromptu press conference (see related story) called to explain his action, D'Amours disclosed that he had withdrawn his proposal at the last minute because had had the rug pulled from under him by National Federation of Community Development Credit Unions (NFCDCU) Executive Director Cliff Rosenthal, who, the day before, had unexpectedly registered his objection to the D'Amours proposal. Furious with the Rosenthal's perceived defection, D'Amours accused the NFCDCU official of acting in cooperation with Wheat-who also, for the time being, opposes the EDS proposal-thus removing the one constituency necessary for the proposal's survival. "Mostly what he wanted was for us to give him the money," D'Amours said of Rosenthal, "so that he could contract it out. And of course he's always after us for as much of the credit union community's money he can get." In the only other action of the day (consideration of the Missouri MBL rule was deleted from the agenda, see related story), the board unanimously approved a continuation until March 8, 2002 of the 18% interest rate ceiling on loans and lines of credit advances for FCUs. The statutory 15% rate, which can be increased by NCUA only after consultation with Congress and designated federal agencies, may be continued if the agency determines that prevailing market conditions warrant it. The rate was due to revert to statutory rate ceiling on September 9. - gmcorrigan@mindspring.com * The term "complex" credit union is used only once in the new rule and is done so for statutory reasons. The term-of-choice thereafter preferred by the rule is credit unions with "applicable RBNW requirements"; * The rule becomes effective January 1, 2001 but doesn't come into play for quarterly filing FICUs until April 30, 2001 and for semiannually filing FICUs until July 31, 2001; * You are a credit union with "applicable RBNW requirements" only if your asset size is above $10 million and your calculated RBNWR is greater than 6%; * You fail your RBNWR test if your actual net worth (generally, retained earnings as a percentage of total assets) is less than your RBNWR; * Under the RBNWR rule a FICU's long-term real estate loan risk portfolio is divided into categories representing real estate loan amounts under 25% of total assets and over 25% of total assets and assigned a risk weighting of 0.06 and 0.14 respectively; * Under the RBNWR rule a FICU's "MBLs outstanding" risk portfolio is divided into categories representing MBL amounts under 12.25% of total assets and over 12.25% of total assets and assigned risk weighting of 0.06 and 0.14; * Under the RBNWR rule a FICU's investments risk portfolio is divided into categories or "buckets" of investment types that are defined by "weighted-average life" terms of 0 to 1 year, 1 to 3 years, greater than 3 years to 10 years, and over 10 years. Each "bucket" has a risk weighting of 0.03, 0.06, 0.12, and 0.20 respectively; * To determine standard RBNWR, you begin by determining what your total long-term real estate loan-to-total assets percentage is and multiply 25% of that percentage by the 0.06 risk weighting and whatever percentage remains by 0.14. You then add those two percentages. This becomes your "standard component" for the long-term real estate loan risk portfolio. You then follow similar procedures for the remaining six risk portfolios, give yourself the appropriate credit for your allowance for loan losses (ALL), aggregate the standard component percentages, and determine your RBNWR. * The "alternative component" calculation methods of determining RBNWR are finer renderings of the first three risk portfolios (representing above-average risk) and their calculation may reduce a FICU's RBNWR; * Under the proposed RBNWR rule, 12 FICUs were projected by NCUA to fail their RBNWR test, but fully 1408 FICUs would have been classified as "risk-based net worth-applicable" credit unions. Under the final rule, NCUA estimates that 17 FICUs will fail their RBNWR test (possibly less when "alternative component" calculations are used) but that only 452 FICUs will be labeled as CUs with "applicable RBNW requirements." -gmcorrigan@mindspring.com