A law passed by Congress late last month giving the NCUA thepower to make payments to the Temporary Corporate Credit UnionStabilization Fund without borrowing from the Treasury Departmentsparked an industry discussion about the agency's assessmentprocess.

Currently, the agency has to borrow the money from the TreasuryDepartment to repay the fund and then assess credit unions. Underthe new law, which President Obama signed on Jan. 4, the agencycould assess credit unions a premium first, without incurringborrowing costs.

The credit union must pay the premium within 60 days and themeasure requires the agency to “take into consideration anypotential impact on credit union earnings that such an assessmentmay have.”

CUNA President/CEO Bill Cheney said the NCUA should pick thelowest cost option for credit unions. If the agency gets the moneyfrom credit unions-rather than borrowing from the Treasury-it wouldmean that the credit union would no longer be earning returns onthose funds.

NAFCU President/CEO Fred Becker suggested in a Jan. 4 letter toNCUA Chairman Debbie Matz that credit unions should be allowed toprepay their assessments, and the NCUA should consider borrowingadditional money from the Treasury.

The FDIC adopted the practice of prepayment in November2009.

CUNA has also advocated that the NCUA consider allowingprepayment.

Becker also noted that while the stabilization fund has $6billion in borrowing authority from the Treasury, the agency shouldrequest to borrow additional money because “current economicfactors clearly justify such additional borrowings.”

Matz said in a statement that the law will result inconsiderable savings for credit unions but didn't directly addressthe suggestions of CUNA and NAFCU.

“The resulting interest savings for credit unions will beconsiderable-prior to this provision becoming law, NCUA paid over$6 million in interest on borrowings from Treasury related to thestabilization fund and would have been projected to pay over $3million annually had the law not been changed. For those in theindustry who are concerned about keeping future assessment costs toa minimum, this change represents a considerable improvement,” shesaid.

The law also allows credit unions that receive assistance fromthe NCUSIF under section 208 of the Federal Credit Union Act tocount that money as net worth. The agency provides such assistanceto facilitate a merger if it would reduce the loss to theNCUSIF.

The NCUA said in a policy analysis it sent to Congress that thechange could give healthy credit unions more incentive to mergewith troubled ones. It also explained that the change is needed tocomply with recent changes in federal accounting standardsregarding how to treat cash infusions into credit unions and otherfinancial institutions.

CUNA and NAFCU had both been supportive of changing the networth definition.

However, former NCUA Executive Director Chip Filson, who nowruns the consulting firm Callahan & Associates, said theprovision would permit the NCUA to “take actions over naturalperson credit unions in the same unilateral manner that thecorporates were taken away from their owners.”

The law also clarifies that the definition of the NCUSIF'sequity ratio is based on the fund's unconsolidated financialstatements. That means that premiums won't be based on consolidatedfinancial statements of conserved financial institutions.

The law also mandates a Government Accountability Office studyof the NCUA's oversight of corporate credit unions and theeffectiveness of how the agency implemented prompt correctiveaction. A report on the study is due by January 2012. Both CUNA andNAFCU are likely to be asked to give the GAO comments about theNCUA's handling of the corporate credit unions' problems.

Within six months of receiving the report, the FinancialStability Oversight Council (of which Matz is a member) must submita report to the House and Senate on actions taken and anyrecommendations issued to the NCUA.

In its material-loss reviews following the conservatorships ofU.S. Central and Western Corporate Credit Unions, the NCUA's Officeof Inspector General blamed both management mistakes andinsufficient oversight by agency examiners for the failures.

WesCorp's management didn't manage risk well and invested tooheavily in residential mortgage-backed securities while NCUAexaminers failed to “adequately and aggressively” address therisks, according to the report.

The loss to the stabilization fund is estimated to be about $5.6billion.

The report on U.S. Central also cited management and examinationmistakes. It said that the agency's examiners and staff failed toidentify and focus on problems with the investment strategy. Itconcluded that “stronger and timelier supervisory action” couldhave reduced the size of the losses, which so far have totaled $1.5billion. But the report concluded that examiners were limited inwhat actions they could take because the regulations onconcentration limits were not strong enough. The agency has sincerevamped the rules to place further restrictions on the investmentpractices of corporate credit unions.