Onsite Coverage: NCUA Board Approves Modified Corporate Prepayment Plan
ALEXANDRIA, Va. — The NCUA board on Wednesday approved a plan allowing credit unions to prepay some of the cost of the rescue of corporate credit unions after substantially revamping the plan to reflect industry concerns.
A key component of the revised plan is raising the aggregate amount required to go forward with the program from $300 million to $500 million.
It also moved to increase the maximum participation amount from 0.36% to 0.48% (48 basis points) of March 31, 2011, insured shares.
But, while touting the benefits of the assessments in 2011 and 2012, NCUA officials did imply that additional assessments, and perhaps prepayment incentives, remain in the credit union industry’s future.
The NCUA said this by noting that if the $500 million goal of participation is reached, Corporate Stabilization Fund assessments would drop 6.4 basis points in 2011.
NCUA officials said that without the program, the agency projects that Corporate Stabilization Fund assessments would be 25 basis points in 2011 and 13 basis points in 2012.
But, the agency said, “If the program results in lower 2011 and 2012 assessments, then assessments in later years must naturally be larger.”
At the same time, the NCUA decided to sustain a provision in the earlier proposal that provides no interest on the funds pre-paid by the credit unions, although a number of credit unions asked during the feedback process that interest be paid on the pre-paid funds.
The NCUA implied that it did so for legal reasons, specifically that it acted under a provision of the Federal Credit Union Act to accept gifts.
“An interest-free prepayment is a type of gift,” the agency said. “NCUA does not have direct authority to issue interest-bearing debt.”
The agency board also lowered the minimum participation amount from $10,000 to the greater of $1,000 or 0.05% (5 basis points) of March 31, 2010, insured shares.
Other changes in the proposed plan include making a commitment to credit unions that the board will use all of the funds received from the voluntary prepayments to a dollar-for-dollar decrease in 2011 and 2012 assessments.
The agency said it raised the target level for the program to $500 million as the price of making the commitment to use all funds from the voluntary prepayments for a dollar-for-dollar decrease in assessments over the next two years.
That was necessary to ensure that assessments stayed on a reasonable payment trajectory and to maintain a responsible level of borrowing capacity, NCUA officials said.
The agency said that if an oversubscription occurs, NCUA will pro-rate credit union pledges to achieve the $500 million level.
The funds are being used to reduce the cost of rescuing the corporate credit unions taken over by the agency after a huge program designed to increase yields offered on deposits of natural person credit unions through purchase of mortgage-backed securities went sour.
Agency officials proposed the program after telling credit unions that the more money the agency receives through the program, the faster it can repay the loan from the Treasury Department and therefore the agency’s interest rate risk would be reduced.