NCUA Seeks Comments on Underserved Area Restrictions Stemming from Lawsuit

ALEXANDRIA, Va.-All three NCUA Board members expressed great interest in hearing back from the public on its proposed regulation limiting the adoption of underserved areas to multiple common bond credit unions in light of the lawsuit the bankers have brought against the agency in Utah. NCUA was granted an extension by the court in the case to review its regulations regarding the addition of underserved areas and instituted a moratorium on non-multiple group credit unions adopting underserved areas. “Based on the review to date,” NCUA Senior Trial Attorney John Ianno said at the Jan. 19 board meeting, the staff was recommending the board issue the proposed rule for comment. The agency is proposing to establish the moratorium as the rule, as well as revising the underserved area service facility requirements to state the facility must be in the area rather than the current “close proximity” requirement. “We think that applying this retroactively would be unfair,” Ianno said in response to a question from NCUA Vice Chairman Rodney Hood. “We believe that the statutory language also reflects Congress’ intent to make clear that this new charter type was authorized to add underserved areas, not exclude the other two federal charter types from doing so, as the bankers are now arguing,” NCUA Chairman JoAnn Johnson stated at the meeting. She added, “It is important to recognize that this proposed rule is being issued in the best interests of credit unions and their members. Because of the uncertainty surrounding the current litigation, NCUA would be derelict if it did not take the action it takes today. Members of federal credit unions deserve no less. We recognize that the history of the statutory changes is subject to different interpretations, that this creates a level of uncertainty for non-multiple common bond credit unions and their potential members, and that we should take reasonable steps to protect them in light of the litigation that has been initiated by representatives of the banking industry.” Johnson also made note of the “hypocrisy” of the American Bankers Association’s lawsuit limiting service to the underserved while complaining to Congress that credit unions are not reaching out enough. ABA President and CEO Edward Yingling issued a statement shortly after the NCUA Board meeting, reading, “We are gratified that our lawsuit has pressed NCUA to take steps to correct its flawed rule. “ABA and NCUA agree on one thing: the mission of credit unions is to serve people of modest means, as the law states. NCUA’s policies, however, have done little to ensure this mission is met. In failing to walk the talk, NCUA has allowed expansionist credit unions to forget their mission and the purpose of their tax exemption.” While calling it a “small step in the right direction,” the bank advocate commented, “But if NCUA really wants to make sure low- and moderate- income individuals are served by credit unions, it would establish meaningful criteria and a system for assessing whether the mission is being accomplished. Even with the proposed change, a multiple group credit union could claim the entire city of Washington, D.C., as an underserved area and then only open a branch in Georgetown. That fulfills neither the intent of the law nor the mission of credit unions. “Of course, this is only a proposal, and only time will tell what the final rule will look like.” NCUA Board Member Gigi Hyland also emphasized that this is a proposal. “This is a proposal and folks who comment will have a voice,” she said. It is “imperative” that credit unions get back to the agency on how the proposed language will impact them positively or negatively. “I’m not sure how much choice they had in this proposal,” CUNA Associate General Counsel Mary Dunn said after the meeting. CUNA will be looking closely at how it will impact credit unions in terms of extra costs and burdens. In other business to come before the board last week, NCUA unanimously issued a final rule amending the eligibility requirement for its Regulatory Flexibility Program that provides well-capitalized, well-managed credit unions some leeway on certain non-statutorily mandated regulations. The final rule, effective 30 days after publication in the Federal Register, would lower the minimum net worth requirement for eligibility from 9% to 7% -equivalent to the well-capitalized benchmark under Prompt Corrective Action. However, the rule would up the duration the minimum net worth must be maintained from one quarter to six consecutive quarters. Federal credit unions that automatically qualify will no longer be notified by NCUA since the institution can determine that. Credit unions qualifying for one or the other would still be able to apply for RegFlex. The change will make 413 more credit unions eligible for RegFlex, according to NCUA Examination and Insurance Program Officer Lynn Markgraf. NAFCU Director of Regulatory Affairs Carrie Hunt commented that the lower net worth requirements for a longer period was not exactly an “apples-to-apples exchange.” CUNA’s comment letter had been flat-out against the six-quarter maintenance period. “We didn’t see that it needed to change from the current rule,” Dunn said. She added that the trade group will continue to work with NCUA on changing the rule. The NCUA Board also approved 3-0 a final rule amending the 5300 Call Report to create a single form for all credit unions. NCUA is eliminating the short form credit unions under $10 million in assets could file at the end of the first and third quarters. Everyone will file one form with schedules to be added for credit unions into more complex operations, such as business lending. The final rule is unchanged from the proposal. Credit unions under $10 million in assets will have to begin using the new form for third quarter data this year while other credit unions will begin with the second quarter filing. “The comments were pretty unanimous in support of this,” Hyland noted. In response to a question from her, NCUA Director of Risk Management Larry Fazio explained that the form will be slightly longer for small credit unions but it will be consistent rather than alternating between the short form and long form. “In today’s environment, having consistent reporting requirements is extremely important,” Hood remarked. The changes made at last week’s board meeting are not related to credit union efforts to seek greater documentation of their service to the underserved, according to the board members. Chairman Johnson said she is hoping the internal working group will have some sort of report in the first quarter. “They are putting in a very strong good-faith effort on our part,” she said. Finally, the NCUA Board unanimously voted out a final rule with a 30-day effective date allowing low-income credit unions to redeem uninsured secondary capital deposits within five years of maturity. NCUA Trial Attorney Steve Widerman explained that when PCA was instituted upon credit unions with the Credit Union Membership Access Act, it caused the applicability of secondary capital toward net worth to be eroded by 20% each of the five years prior to maturity. It would “artificially” dilute the credit union’s net worth, he said, but the credit unions were unable to divest it. Under the final regulation, they can with some stipulations, NCUA Examination and Insurance Program Officer Margaret M. Miller explained. The credit union’s post-redemption net worth would have to be at least 6%, the secondary capital would have to be on deposit a minimum of two years, the credit union’s books and records must be current and everything fully disclosed, and a resolution of divestiture must come from the full board of directors, among other things. Additionally, low-income credit unions will have to get prior approval for, not just submit, as it was previously, a plan on how the secondary capital will be used before accepting it. The credit union must tell NCUA the maximum aggregate amount the credit union plans to accept in secondary capital deposits; it must be consistent with business and strategic plans and the budget; and the application must include pro forma financial statements. Changes were also made to the disclosure and acknowledgement form, including a new section on prepayment risk and a clarification that secondary capital cannot be used for dividends. The new rule does not cover secondary capital accounts that were included in plans prior to the rulemaking. Johnson commented that the idea for this rule was first raised with her at a roundtable of low-income credit unions; she said it was probably their top priority at the time. She added that NCUA was able to “arrive at a solution that is going to be beneficial for them as well as the regulator.” Hyland applauded the rule as “responsive.” -