When doing the first major overhaul of corporate credit unions in eight years, the NCUA covered the regulatory waterfront.
The agency did everything from placing stricter limits on investment concentrations to limiting the activities of corporate credit union-owned CUSOs.
The board approved the final rule at its Sept. 24 meeting and then proposed an additional rule in November.
In the rule approved at a special September meeting (the same one at which the NCUA Board conserved three additional corporate credit unions), the biggest change was the simplification of limitations on permissible corporate investments. The regulator completely eliminated all subordinated securities and private-label mortgage-backed securities rather than allowing them in limited concentrations as originally proposed.
All capital and retained earnings requirements remained as proposed. The previous corporate capital requirement of 4% was replaced with three ratios: a 4% minimum leverage ratio, a 4% Tier 1 risk-based capital ratio and an overall 8% total capital ratio with a risk-based element. These ratios are required to maintain "adequately capitalized" status; well-capitalized corporates would require higher capital standards.
The rules go into effect next October. After one year, capital and retained earnings requirements will be implemented on a grandfathered basis, with the 4% Tier 1 risk-based ratio and 8% total risk-based capital ratio required on the one-year anniversary. The 4% leverage ratio isn't required of corporates until the final rule's third anniversary.
NCUA Deputy Executive Director Larry Fazio, who oversaw the agency's work on the rescue of corporate credit unions, explained the rationale for its decision on subordinated securities and related investments.
"We decided they weren't worth the trouble," he said. And he pointed out that the two types of investments were responsible for the vast majority of corporate losses. Original proposals to prohibit collateralized debt obligations and net interest margin securities were also included in the final rule.
Other investment rule changes involved the simplification of weighted average life limitations. For example, the NCUA removed complex NEV chipping tests from the final regulations. Fazio said the controversial two-year weighted average requirement is still in the regulations, but the NCUA provided some leeway on government agency investments, granting them a 50% conversion factor. Now if a corporate purchased, for example, a four-year Treasury note, only half of its average weighted life-two years-would count for regulatory purposes.
Other rules grandfathered in involve the NCUA's new authorities over corporate-owned CUSOs. Corporate CUSOs may only engage in services preapproved by the NCUA, which initially includes limited services such as brokerage and investment advisory. CUSOs must also open their books, personnel records, equipment and facilities to NCUA monitoring. Rather than demand that CUSOs comply within 90 days of publication, they will be given 180 days to gain NCUA approval and a full year to divest from prohibited activities.
The urgency to reform the corporate rule became apparent because of the heavy losses at several of the corporates-especially U.S. Central and WesCorp, which the NCUA placed into conservatorship in 2009-from investments in mortgage-backed securities.
The agency has filed suit in federal court in Los Angeles seeking $1 billion from 16 former WesCorp executives and directors, including former President/CEO Robert Siravo and CUNA President/CEO Bill Cheney, a former WesCorp director.
The NCUA is alleging a breach of fiduciary duty and negligence for not doing enough to protect the institution against excessive risk. The agency also alleges that three former WesCorp executives manipulated the credit unions' retirement plan to increase benefits to them.
No trial date has been set, but there is a hearing scheduled for Dec. 20 on a motion by the lawsuit defendants to have the lawsuit dismissed.
The NCUA plans to make more changes to the corporate credit rule next year.
In November, the agency sent out for public comment a proposed rule that would limit natural person credit unions to joining one corporate, set up a system-wide risk mitigation committee and mandate that each corporate have a risk management committee. It would also allow corporates to assess annual membership fees and increase the amount of retained earnings and mandate that each corporate prepare an annual management report that assesses how well it is in compliance with NCUA regulations.