<p>WASHINGTON – NCUA's proposed changes to Part 704, the corporate CU reg, include so many positive things, say corporate CU leaders, but unfortunately all those positives are overshadowed by one major negative – the 2% RUDE (Reserves, Undivided Earnings) requirement. Gigi Hyland, executive director of the Association of Corporate CUs, said NCUA is clearly trying to align corporate CU capital measures more closely with what other financial regulators use, but that's not easy when dealing with the unique nature and objectives of corporate CUs. "I think NCUA is trying to come up with something that is easy to explain to congressional folks and other regulators to have an apples-to-apples comparison of capital. The way corporates build capital is very different than other financials," said Hyland. Hyland said unlike other financials, corporate can't go out and issue common stock. Paid-in-capital (PIC) was encouraged by NCUA as a long-term capital tool, and it's been expensive for corporates to utilize. Pete Pritts, president/CEO of FirstCorp, can't believe how PIC would be undervalued in the new 704. "My main problem is we went out and raised a substantial amount of PIC. In the wording (of proposed 704) PIC is rendered useless and worthless. I find that to be frustrating," said Pritts. "If we have to double or triple our RUDE ratio overnight, we won't be very competitive. It makes good business sense to eliminate PIC. It's very expensive. But to just flip the switch and live off RUDE immediately is unfeasible," said Pritts. In fact Hyland said if the 2% RUDE had went into effect immediately, six or seven corporates would have to file a capital restoration plan under the new reg. "To me it's not a good thing. Capital restoration doesn't sound good, even if it's just having to file a plan. It doesn't invoke confidence," said Hyland. She said those corporates all received very high capital ratings, but that wouldn't matter under the proposed reg because of the RUDE ratio. She also noted that the dramatic liquidity swings of 2000 and 2001 would have made maintaining 2% RUDE very difficult, yet corporates fulfilled their role as a liquidity provider/absorber for CUs in those two very different liquidity years. Mid-Atlantic Corporate FCU President/CEO Ed Fox said he's not clear where NCUA came up with the 2% figure for the RUDE ratio. "We feel that 2% is an arbitrary number. That's a number that's going to almost immediately impair our ability to grow. Corporates are supposed to be able to absorb liquidity quickly and provide it quickly," said Fox. Like Pritts, Fox is concerned about the back seat PIC would take under the proposed reg. "Corporates were encouraged to issue PIC. Some did and some didn't. The new reg doesn't provide a whole lot of benefit to providing PIC. It drove up their operating costs. We can understand why corporate that issued it are upset," he said. Hyland said ACCU has been in direct contact with NCUA Chairman Dennis Dollar on the RUDE issue, and she is confident he understands ACCU's position. Hyland said though this may seem like an esoteric issue, it could have broader effects on how NCUA looks at capital for natural-person CUs as well. "PCA offers alternative means of building capital. In the whole RegFlex reg capital is so integral. I think NCUA has to get this right. How they treat capital for the corporates could be indicative of how they'll treat it for credit unions," said Hyland. "The catch-22 is that on one hand NCUA wants to align corporate capital with other regulators. Clearly other regulators have a leverage ratio requirement. Problem is other financials can include other things in the calculation of that leverage ratio. If you only include RUDE, you give no value to PIC," said Hyland. [email protected]</p>