Lobbyists for credit unions fought for, and obtained, parity in the government programs to rescue troubled financial institutions.
Congress included credit unions in the legislation-penciling them in during the negotiations-and including the NCUA chairman on the list of advisers to the Treasury Department. Then the Bush administration signed off and, after much wheeling and dealing and an initial rejection by the House, the measure passed and President Bush signed it in early October.
Then the Treasury Department had a change of heart.
It focused on buying stakes in banks to give them more capital so they could lend more money rather than buying bad mortgages. Several banks have instead used the additional capital from the Troubled Asset Relief Program to finance the purchase of other banks (such as Wells Fargo's purchase of Wachovia). Also several companies, such as American Express and Goldman Sachs, have sought to be reclassified as depository institutions so they can avail themselves of TARP funds.
The legislation provided for parity for credit unions but since credit unions don't issue stock, the government can't infuse capital in them that way. And, because the government hasn't bought any troubled mortgages, credit unions haven't had access to capital that way.
Credit unions, which for the most part had not engaged in the lending practices that caused the financial crisis but were suffering residual damage, were left out in the cold.
CUNA and NAFCU sent repeated letters to lawmakers and administration officials urging that the policy be switched so credit unions could have access to the money. They wanted credit unions to have access to the funds but hoped they wouldn't have to use them.
On Nov. 19, NCUA Chairman Michael E. Fryzel urged lawmakers to push the Treasury Department to release some money to credit unions.
"Recent credit union examination data indicates that a TARP-like program, which creates a market for certain distressed assets, would be of significant and tangible benefit to credit unions," he wrote.
That data included a 71.9% increase in the provision for loan and lease losses, a 20-basis-point increase in the loan delinquency ratio from 0.93% to 1.13%, an increase in the net charge-off ratio from 0.51% to 0.75%, and a decline in the return on average assets ratio from 0.64% to 0.51%.
CUNA and NAFCU are also urging the NCUA to create a separate TARP program for credit unions, though they disagree on how it should be structured.
CUNA wants to use the insurance fund, even if it means charging individual credit unions higher premiums, to show that credit unions are dealing with the problem in-house; the idea is that this could make Congress and the new administration less likely to sweep credit unions with other financial institutions in a potential regulatory restructuring next year.
"The amount of capital needed would require at most a 10-basis-point increase in the premium cost of the program and most credit unions won't mind paying it to keep credit unions in stronger shape," said CUNA Senior Vice President of Research and Policy Analysis/Chief Economist Bill Hampel. "A little bit of proactive recapitalization of credit unions would be better than paying higher resolution costs later."
NAFCU has strong reservations about using the insurance fund and instead is pushing for access to regular TARP funds.
"The insurance fund is designed to protect member deposits and if that is compromised, people will be concerned that the backstop firewall is weakened," said NAFCU Director of Legislative Affairs Brad Thaler.
The NCUA is still reviewing policy alternatives in this area.
On a related matter, on Nov. 19 Fryzel unveiled the Credit Union Homeowners Affordability Relief Program, which would provide funds through the Central Liquidity Facility to help credit unions rewrite mortgages.
The details on the program's structure were initially sketchy as the agency got sign offs from the Treasury Department and the Federal Reserve. On Dec. 9, the agency rolled out the specifics.
Credit unions will apply for funds, which originate from the CLF, through corporate credit unions. The program is designed to help credit unions lower rates so that borrowers won't spend more than 38% of their monthly income on their mortgages.
The CLF will provide advances to eligible credit unions to invest in a CU HARP Note guaranteed by the NCUSIF. The note will provide up to a 1.0% bonus over the CLF advance rate. Credit unions will be required to match the bonus and thereby provide up to 2% in mortgage rate relief to homeowners.
The criteria for mortgage modification include targeting a payment-to-income ratio of 31% to 38%; minimum mortgage interest rate of 3%; maximum household income of 150% of medium income for the zip code; and verified owner-occupied residence.
The $2 billion fund, which is scheduled to begin distributing money in January, is expected to help approximately 10,000 low- and middle-income credit union members, according to the NCUA.