WASHINGTON-Hurricane Katrina-impacted credit unions and other financial institutions would have 18 months to shape up their capital before Prompt Corrective Action kicks in under legislation introduced by Congressman Richard Baker (R-La.). The Hurricane Katrina Financial Institutions Disaster Relief Act (H.R. 3945) would allow NCUA and the other federal banking regulators to waive Prompt Corrective Action triggers for institutions directly impacted by the mega-storm that struck Louisiana, Mississippi, and Alabama. Specifically, the legislation would cover institutions that were deemed “adequately capitalized” prior to the hurricane and had 50% or more of deposits coming from within the affected area. To receive a waiver, the institution’s drop in capital must have occurred as a direct result of Hurricane Katrina. Additionally, under the plan, the waiver must be used to help the financial institution’s safe and sound recovery. The impacted institution must have a net worth recovery plan in place and the regulator is authorized to discount deposit insurance proceeds from an institution’s assets in capital calculations for PCA. The bill would also waive Federal Reserve wire service fees for institutions in the impacted area for six months. CUNA supported the aim of the legislation but recommended a number of changes to take into account credit unions’ unique nature. Following Katrina, CUNA President and CEO Dan Mica wrote, several credit unions could experience PCA problems because of a relocation of their membership or the uncertain future of their communities. “Furthermore,” he wrote, “consistent with the true cooperative nature of the credit union movement, many credit unions outside the hurricane’s path are willing to help in a variety of ways such as purchasing loans from affected credit unions. However, their ability to help is seriously tempered by PCA, particularly in the era of problematic loans.” Specifically, the bill should: * Use the definition of insured depository institution in the Federal Reserve Act that includes credit unions. The current wording throughout the bill suggests that credit unions are not insured depository institutions; * Aid credit unions or other insured financial institutions outside the affected area and should be amended to help those that have members or customers there with, for example, loans that go bad or that purchase loans or participations that are bad; * Authorize the regulators to waive PCA requirements for any affected undercapitalized credit union. On a case-by-case basis they should be able to waive requirements for critically undercapitalized institutions; * Include affected institutions with 50% of total deposits or loans from persons who normally reside in the area; and * Provide the regulators the authority to extend PCA forbearance authority for an additional 18 months after which time it could be extended further by Congress. NAFCU President and CEO Fred Becker threw his trade association’s support behind the temporary PCA relief as well and urged that it be made permanent. In a separate letter to Baker, NAFCU’s chief wrote that the trade association supported his efforts in H.R. 3945 and thanked him “for including this temporary PCA relief for credit unions that have been impacted by these recent disasters.” However, permanent changes are necessary as well, he added. “NAFCU strongly supports PCA reform as the current one-size-fits-all system does not accurately reflect risk,” Becker wrote. “Simply stated, the current system unfairly penalizes well run, risk-averse credit unions even though the credit union community, as a whole, has a very good loan loss history. Finally, the system fails to reflect the true cost of credit unions that actually do have risky portfolios.” For example, he explained, a brand new $10,000 unsecured loan is ranked the same risk as a mortgage in its last year, “something that simply does not make sense.” NAFCU asked the congressman’s support for permanent PCA reform in a broader regulatory relief package, like the Credit Union Regulatory Improvements Act (H.R. 2317), stating that it would better allow NCUA to manage the risk to the insurance fund and help credit unions provide service to their members. CUNA Senior Vice President of Governmental Affairs John McKechnie stated, “Hopefully Congress will act to allow all types of financial institutions greater flexibility in a number of areas, including more reasonable PCA standards and more ability to get capital into businesses and communities.” “We support the efforts to provide temporary relief and think it also demonstrates the need to provide a more permanent relief to credit unions in the form of risk-based capital.such as what’s found in the CURIA legislation,” NAFCU Director of Legislative Affairs Brad Thaler told reporters last week. Between Hurricanes Katrina and Rita and a new Supreme Court nominee, Congress has a lot on its plate with few legislative days remaining. The House and Senate were out part of last week in observance of Rosh Hashanah and are out this week for Columbus Day recess. The legislative body was initially supposed to end the congressional session last week, but now plans to work up until the week of Thanksgiving. [email protected]

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