New NCUA Powers Spark Debate
A law passed by Congress late last month giving the NCUA the power to make payments to the Temporary Corporate Credit Union Stabilization Fund without borrowing from the Treasury Department sparked an industry discussion about the agency's assessment process.
Currently, the agency has to borrow the money from the Treasury Department to repay the fund and then assess credit unions. Under the new law, which President Obama signed on Jan. 4, the agency could assess credit unions a premium first, without incurring borrowing costs.
The credit union must pay the premium within 60 days and the measure requires the agency to "take into consideration any potential impact on credit union earnings that such an assessment may have."
CUNA President/CEO Bill Cheney said the NCUA should pick the lowest cost option for credit unions. If the agency gets the money from credit unions-rather than borrowing from the Treasury-it would mean that the credit union would no longer be earning returns on those funds.
NAFCU President/CEO Fred Becker suggested in a Jan. 4 letter to NCUA Chairman Debbie Matz that credit unions should be allowed to prepay their assessments, and the NCUA should consider borrowing additional money from the Treasury.
The FDIC adopted the practice of prepayment in November 2009.
CUNA has also advocated that the NCUA consider allowing prepayment.
Becker also noted that while the stabilization fund has $6 billion in borrowing authority from the Treasury, the agency should request to borrow additional money because "current economic factors clearly justify such additional borrowings."
Matz said in a statement that the law will result in considerable savings for credit unions but didn't directly address the suggestions of CUNA and NAFCU.
"The resulting interest savings for credit unions will be considerable-prior to this provision becoming law, NCUA paid over $6 million in interest on borrowings from Treasury related to the stabilization fund and would have been projected to pay over $3 million annually had the law not been changed. For those in the industry who are concerned about keeping future assessment costs to a minimum, this change represents a considerable improvement," she said.
The law also allows credit unions that receive assistance from the NCUSIF under section 208 of the Federal Credit Union Act to count that money as net worth. The agency provides such assistance to facilitate a merger if it would reduce the loss to the NCUSIF.
The NCUA said in a policy analysis it sent to Congress that the change could give healthy credit unions more incentive to merge with troubled ones. It also explained that the change is needed to comply with recent changes in federal accounting standards regarding how to treat cash infusions into credit unions and other financial institutions.
CUNA and NAFCU had both been supportive of changing the net worth definition.
However, former NCUA Executive Director Chip Filson, who now runs the consulting firm Callahan & Associates, said the provision would permit the NCUA to "take actions over natural person credit unions in the same unilateral manner that the corporates were taken away from their owners."
The law also clarifies that the definition of the NCUSIF's equity ratio is based on the fund's unconsolidated financial statements. That means that premiums won't be based on consolidated financial statements of conserved financial institutions.
The law also mandates a Government Accountability Office study of the NCUA's oversight of corporate credit unions and the effectiveness of how the agency implemented prompt corrective action. A report on the study is due by January 2012. Both CUNA and NAFCU are likely to be asked to give the GAO comments about the NCUA's handling of the corporate credit unions' problems.
Within six months of receiving the report, the Financial Stability Oversight Council (of which Matz is a member) must submit a report to the House and Senate on actions taken and any recommendations issued to the NCUA.
In its material-loss reviews following the conservatorships of U.S. Central and Western Corporate Credit Unions, the NCUA's Office of Inspector General blamed both management mistakes and insufficient oversight by agency examiners for the failures.
WesCorp's management didn't manage risk well and invested too heavily in residential mortgage-backed securities while NCUA examiners failed to "adequately and aggressively" address the risks, according to the report.
The loss to the stabilization fund is estimated to be about $5.6 billion.
The report on U.S. Central also cited management and examination mistakes. It said that the agency's examiners and staff failed to identify and focus on problems with the investment strategy. It concluded that "stronger and timelier supervisory action" could have reduced the size of the losses, which so far have totaled $1.5 billion. But the report concluded that examiners were limited in what actions they could take because the regulations on concentration limits were not strong enough. The agency has since revamped the rules to place further restrictions on the investment practices of corporate credit unions.