Credit unions and their trade groups appear to be voicing support for the NCUA plan to allow credit unions to prepay some of the cost of the bailout of corporate credit unions.
But, in a statement, CUNA President/CEO Bill Cheney said that while CUNA supports the plan, he believes the NCUA did not go far enough in revamping the initial proposal 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.
But Cheney said that it is “disappointing that interest will not be paid on prepayments, and, more importantly, that the size of the prepayment program will be capped at $500 million.”
He said a higher minimum of $1 billion, which CUNA had suggested, would have allowed a greater reduction in this year’s assessment beyond NCUA’s projected 6.4 basis points, “making the program more appealing to credit unions.”
NAFCU President Fred Becker was more supportive.
“We were pleased to see this morning that the NCUA was forthcoming with details on its prepayment plan and the effect it will have on future assessments,” he said.
Charles Bruen, president/CEO of First Entertainment Credit Union in Hollywood, Calif., said, “We applaud the NCUA for taking this action and admire the credit unions that are willing to step up and make zero-interest loans to the NCUA-managed TCCUSF,” referring to the Temporary Corporate Credit Union Stabilization Fund.
“Such charity is commendable,” he said, adding that, “anything that helps to reduce the cost of the corporate credit union failure is a good thing.”
“We understand that natural person credit unions are going to pay for the corporate credit union crisis in one way or another and this program enables the most charity minded credit unions to nobly pay more than those of us more focused on preserving our members’ capital,” Bruen said. “This is a win-win situation for everyone involved.”
Besides increasing the proposed cap from $300 million to $500 million, the plan approved by the NCUA increases the maximum participation amount from 0.36% to 0.48% of insured shares as of March 31, 2011.
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 by 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.”
Regarding the interest issue, NCUA officials said at the board meeting where the plan was formally unveiled and passed that the decision not to pay interest on the funds prepaid by the credit unions was based on legal issues.
NCUA officials said they acted under a provision of the Federal Credit Union Act that allowed the agency to accept gifts.
“An interest-free prepayment is a type of gift,” the NCUA 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% of March 31, 2010, insured shares.
On the cap issue, Melinda Love, director of the Office of Examinations and Insurance, said the agency made the decision to cap it in order to reduce the implications for CU balance sheets.
She said it was designed that way to ensure that it would be “immaterial to the balance sheet and the liquidity of most CUs,” although Love and the NCUA staff cautioned that each CU should ask its accountants to take a hard look at each CU’s balance sheet to ensure that there is no material impact through the prepayment.
Love also said, “We don’t want a handful of CUs taking on the burden of paying for this.”
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 with the Treasury Department, NCUA officials said.
The agency said that if an oversubscription occurs, the NCUA will pro-rate credit union pledges to achieve the $500 million level.
The funds are being used to reduce the cost of bailing out 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.
In a Power Point presentation, the NCUA board was told at the meeting that $8.44 billion in debt stemming from the corporate credit union insolvencies come due in a little more than a year, in October 2012.
NCUA officials said at the meeting they have $6 billion in borrowing authority from the Treasury but plan to use only $5.5 billion.
The NCUA said it will not implement the voluntary program unless it receives commitments for at least $500 million.