NEW YORK – The National Federation of Community Development Credit Unions and some individual CDCUs are stepping up their long-standing efforts to convince NCUA to modify or eliminate its policy on non-member deposits held by the community development institutions. Under current NCUA regulations, CDCUs can take deposits from non-members, traditionally other credit unions but increasingly other financial institutions as well. However, if the CDCU has more than 20% of its assets, or $1.5 million whichever is greater, in non-member deposits then it has to obtain a waiver from the agency’s regional director from its region every two years. The waiver request must be accompanied by documentation from five areas of the credit union’s activities and can often be quite extensive, according to the NFCDCU and some of the credit unions involved, and often duplicates similar information that is provided in exams and to fulfill Prompt Corrective Action regulations. “The bottom line is that this is an antiquated and obsolete regulation,” said Cliff Rosenthal, executive director of the Federation. “Furthermore one that has never really accomplished what it was intended to accomplish,” he said. Rosenthal and the credit unions pointed out a one-time financial scandal had ushered the regulation into the agency’s rulebook and that the agency had not put the regulation through the customary comment and review process. “In my memory this was the only time the agency put into a place a regulation on such an `emergency’ basis,” Rosenthal said. In November 1988, the NCUA liquidated the Franklin Community Federal Credit Union, based in Omaha, Nebraska, in the wake of a significant financial fraud, according to Rosenthal. The credit union executive had been keeping two sets of books at the credit union and had been soliciting non-member deposits from all over the country at fraudulent interest rates. In the wake of the scandal, the next month, December 1988, the agency rushed into its rules a regulation forbidding CDCUs from having more than 20% of it assets come from non-member deposits, Rosenthal explained. The ban, with some modifications like the addition of the waiver, has been in place ever since, he said. “At the time we didn’t pay any attention to it because it seemed like reaching that was so far off,” said Joy Cousminer, CEO of the $8.9 million Bethex Federal Credit Union, based in Bronx, New York. “Twenty percent! We couldn’t even really imagine it. But then CRA regulatory enforcement came in and we started getting non-member deposits in larger amounts and all the sudden we were up against the ban,” she said. The NCUA under then chairman Norm D’Amours recognized and partially ameliorated the problem by giving the option of choosing to operate under a $1.5 million cap and then by setting up the waiver procedure for credit unions whose non-member deposits surpassed both caps. “In our situation it particularly doesn’t make any sense,” said Cousminer. She pointed out that her non-member deposits don’t change from year to year and now they are invested in secured, insured, regulated investments. “When we first started having significant deposits we didn’t know any better and invested short term,” she said. “But now we invest them in long term vehicles, some as long as five years, to try to get the better yields and income,” she said. In the light of the investment profile, the two-year waiver interval makes no sense, she pointed out. “I mean what would they do if we didn’t get the waiver,” Cousminer asked. “These investments we are in are contractual. We can’t just pick up and leave them without paying penalties,” she added. She also contended that only one of the financial institutions which had deposited money with Bethex, a Japanese bank that went bankrupt, had ever asked for its money back and that all had just recently agreed to take even lower interest on their deposits. Cousminer also added that Bethex had been notified that it qualified for NCUA’s regulatory flexibility program. “Why isn’t this subject to Reg Flex,” she asked. The fundamental issue is that in an age of PCA regulations and at-risk exams, this regulation really cannot be defended any longer, Rosenthal said. The NCUA Board feels the reg is necessary. Although scheduling difficulties prevented NCUA Board Chairman Dennis Dollar from commenting on the issue in time for this article, NCUA Board Member Deborah Matz weighed in with the opinion that the waiver exception kept the regulation from being too inflexible and burdensome. “This is a safety and soundness issue,” she said, and when the amounts of money and risk get larger, the agency gets more interested, she added. [email protected]

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