On Secondary Capital and Low-Income CUs
Sarah Snell Cooke' s column ["Secondary Capital Prescription," CU Times, April 21] quotes extensively from the NCUA's recent white paper describing the "mixed results" of the use of secondary capital by low-income credit unions.
The article quotes the figure that 83% of low-income credit unions with secondary capital are "subject to little or no prompt corrective action," compared to 97% of the general CU population. That sounds like a glass considerably more than half full to me. Low-income credit unions by their very nature are in a higher risk business than credit unions that restrict themselves to more prosperous members. In general, they do not enjoy the same capital levels to begin with as other credit unions. It should not be surprising that more fall into PCA territory.
Cooke quotes at length the deficient practices on the part of some low-income credit unions cited by the white paper. The NCUA's assessment makes no effort to balance this with the upside of low-income credit unions that have been able to grow successfully with the aid of secondary capital.
Undoubtedly, some of the criticisms leveled by the NCUA are true. A similar, and probably more devastating and expensive, list of failings could be generated with respect to the credit unions that engaged in indirect lending, participation loans and option ARMs-not to mention investments in "highly rated" mortgage bonds.
Finally, we should note that secondary capital in low-income credit unions has saved the NCUSIF substantial money, since in the case of credit union failures, it has absorbed losses that the share insurance fund would otherwise have incurred.