Evaluating Corporate Prepayment Plan: Wait and See
Wait and see.
Credit union executives spent the first week after the NCUA unveiled its corporate credit union prepayment plan studying it and reserving judgment.
A vast majority of credit union chief executive officers who were asked about the plan said they didn’t know enough to comment, and most hadn’t run the numbers to see if it will work for their financial institution.
John Graham, president/CEO of Kentucky Employees Credit Union in Frankfort, said he was pleased the agency was offering the plan but was undecided about whether to participate.
"Lots of credit unions have extra cash on hand so they might conclude that parking it at NCUA might not be a bad idea," said Graham, whose credit union has $58 million in assets "But others don’t trust the NCUA. They see it as wielding its hammer and blaming other people for problems that they missed."
Former NCUA Chairman Dennis Dollar, who now consults for credit unions, said the industry executives he has spoken with think the plan is too late.
"There is a feeling that this would have been timelier a couple of years ago before the major outlays were required. Now it’s coming after a couple of really tough years. They don’t have the flexibility to take as much of a hit after dismal 2009 and 2010," he said. "Give the agency credit for innovation, if not timeliness."
Under the proposed plan, credit unions could prepay between $10,000 and 36 basis points of insured shared toward their assessments to pay the costs of the rescue of corporate credit unions.
Credit unions wouldn't earn any interest and the total collected in prepayments would have to be at least $300 million for the program to take effect.
CUNA and NAFCU have been pushing the NCUA to allow credit unions to prepay the assessments that are financing the repayment of the loan from the Treasury Department that helped rescue the corporate credit unions in 2009.
Both trade associations praised the agency for coming out with a plan and said they would work with their members to determine whether the program would work for them and neither commented on its merits.
The NCUA program, which is subject to public comment through June 20, is modeled in part on a similar plan that the FDIC instituted. However, the FDIC’s plan made the prepayments mandatory.
NCUA Associate General Counsel Paul Peterson told the NCUA Board on May 19 that the statutory powers of the FDIC and NCUA are different and under the law, and the agency couldn’t require prepayments.
During its meetings with the agency, CUNA advocated for a mandatory prepayment plan under which credit unions would have to prepay three years worth of assessments up front, totaling 48 basis points, but the credit unions could have been allowed to expense the payments over three years.
The NCUA has estimated that assessments for natural person credit unions to repay the costs of the corporate credit union rescue will be between 20 and 25 basis points this year. And there will be annual assessments through 2021.
The agency said it needs to raise $2.94 billion through assessments in 2011 and 2012, and this would require a combined 38 basis point assessment during those two years.
Agency officials said that future assessments would be lowered for all if CUs prepaid the corporate stabilization assessments to a sufficient level.
The agency won’t publish a list of CUs that has prepaid their assessment, but all the information would be included on Call Reports.
Dollar predicted the plan will be more popular with smaller credit unions because their capital ratios are higher and they have more flexibility.
He added that some would not participate because they like the certainty of the pay
"No credit union likes assessments but they like uncertainty even less," he said.