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ALEXANDRIA, Va.-After literally years of debate and preparation, not everyone is satisfied with the new corporate credit union rule approved at last week’s NCUA Board meeting, not even one of the board members. With some concessions to the credit union industry the new Part 704 passed by a 2-1 vote, with NCUA Board Member Deborah Matz dissenting. Over the last two-plus years, the NCUA has issued two advanced notices of proposed rulemakings, two proposed rules, and held numerous focus groups on corporate credit union capital, investments, credit, asset liability management, and operational issues. Through the process, which also involved numerous comment letters from the credit union and banking communities, the NCUA Board arrived at five changes to its most recent proposal for its final rule. The main changes included: *Required compliance with the paid-in-capital provisions until July 1, 2003; *Revised restrictions of dividends paid out if the retained earnings ratio falls below 2%; *Permitting the purchase of servicing rights in conjunction with the purchase of the loan; *Modifying the definition of a credit union trade association; and *Capping BBB investments at 25% of capital. This last provision is the one that Matz found hard to swallow. She said such a concentration in low-grade stocks “potentially threatens the safety and soundness of the system.” Matz added that she preferred to err on the prudent side of caution on this matter. The Treasury Department agreed with her, as she pointed out. Though not an official comment letter from the agency, Treasury Acting Assistant Secretary for Financial Institutions J. Patrick Cave wrote a letter to each NCUA Board member cautioning against permitting corporate credit unions to take on long-term investments rated as low as BBB. “We support the NCUA’s objective of seeking greater comparability between rules governing corporate credit unions and rules for other financial institutions engaged in similar investment lending and other activities. Based on our review of the proposed rule, we are concerned about several provisions that, taken together, might lead to a weakening in safety and soundness while falling short of achieving the NCUA’s goal of comparability with other regulated entities,” the letter read. It also noted Treasury’s opposition to eliminating the inter-corporate investments, less restrictive concentration limits than those applied to banks, and eliminating the 5% minimum capital to engage in expanded powers, among other things. In NCUA Chairman Dennis Dollar’s rebuttal remarks he commented, “The results of this speak for themselves. The numbers are strong and the realities of the marketplace are crucial.” The chairman pointed out that the marketplace is very different from when the rule was last updated in 1995. “If we ever get to the point where we restrict corporates to government securities, my fear is they would not be in business very long because the return on investment is so small in most cases that we have to be willing to allow them to manage risk,” he said. NCUA CFO Dennis Winans presented the quarterly review of the National Credit Union Share Insurance Fund (NCUSIF), which indicated not so good, but not so surprising trends. He and Dollar emphasized that the fund and the credit union system remain strong. Net income for the fund is expected to drop $42 million from last year, from $164.1 million to $121.9 million, according to the report. Through September, the agency had budgeted for $103.3 million, but only reached $94.8 million. The fall was somewhat expected due to the drop in interest rates over the last several quarters. Further decline can be predicted in the near future, as $3 billion in NCUSIF investments will mature over the next year. Winans explained that when those funds get reinvested, it will be at lower rates. For example, he said that the fund reinvested $827 million yesterday in overnights earning 1.74% interest. Insurance losses turned out to be higher than projected for the fund, Winans said. While the fund had budgeted for $4.5 million in insurance losses, actual losses have totaled $6.9 million through September, all of which have occurred since July. The number of troubled credit unions dropped by two from the August report to 227, which is still above the readings for this time last year. Additionally, of the 227 troubled credit unions, all but 53 have less than $10 million in assets. The report showed that 0.68% of the total insured shares represented CAMEL 4/5 credit unions. On a good note though, the NCUSIF’s operating expenses are down from the $69.6 million budgeted to $62.6 million, the quarterly report found. The NCUA Board also unanimously approved two adoptions of underserved areas for SSA Baltimore Federal Credit Union to add 86% of the City of Baltimore to its field of membership and Lafayette Federal Credit Union to add 79% of the population of Washington, D.C. Webster First Federal Credit Union of Worcester County, Massachusetts requested an expansion to its community charter to serve the entire county. In 1995, under the rules in place at the time, the credit union gave up a swath of its field of membership to convert to a federal charter. The board unanimously approved the proposal, which included 10 census tracts that meet the Community Development Financial Institution’s definition of underserved. The NCUA Board members also unanimously approved the agency’s Five Year Strategic Plan. [email protected]

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