In 2002, when the NCUA was considering a series of regulations of the corporate credit unions-including a 2% earnings retention requirement-the agency received a comment letter from the Association of Corporate Credit Unions.
The requirement would be "more palatable" than other more stringent requirements that had been proposed, but "the marketplace provides continuing, persistent incentive to corporates to build reserves and undivided earnings."
The author of the letter was Gigi Hyland, at the time the association's executive director and now a member of the NCUA Board.
Hyland told Credit Union Times that while she's not sure how much that requirement would have helped prevent the problems currently facing corporate credit unions, there is no question that stronger regulations would have been helpful.
"All of us have been surprised at what happened and in looking through the rear view mirror there are several things we can correct. One thing is the issue of concentration; we want to be sure that corporates don't have too much invested in a good thing. And at the time mortgage-backed securities were considered a good investment. Also, the reliance on ratings agencies is something that needs to be looked at."
The association was not alone. Both CUNA and NAFCU took similar positions. And the final rule did not include the requirement though it did mandate that a corporate credit union must increase retained earnings if the prior month-end retained earnings ratio was less than 2%.
CUNA Senior Vice President and Deputy General Counsel Mary Mitchell Dunn wrote that the trade group questioned the necessity of the requirement. NAFCU President/CEO Fred Becker wrote that NCUA's approach was not ideal because "fluctuations are inherent in a corporate's balance sheet" and decreases in earnings can sometimes be expected and that doesn't "necessarily indicate the need for earnings retention."
NCUA Deputy Executive Director Larry Fazio said last week that the strong opposition of the trades influenced the agency's decision not to include the requirement in the final rule. Had the trades not pushed so hard, he contended, the agency might have made a different decision, and therefore lessened the size of the corporates' current financial problems.
Fazio also recalled that industry pressure was so strong that staff members were told by the board at the time they weren't allowed to recommend a proposal that would have limited corporates' investments to 25% in any one sector-an act that he said would have spread out the risk.
Dennis Dollar, who was the NCUA chairman at the time, did not return two phone calls seeking comment. However, in a page 4 story in the April 8 edition of Credit Union Times, he was quoted as saying, "I'll be the first to admit that, even though it was not included in the original corporate rules established in 1995 that we inherited, we obviously made a mistake when we rewrote the corporate rules in 2003 by not over-riding the internal staff's reluctance and adopting a Basel-type, risk-weighted capital system that correlated the weighting process into the expanded authority regi-men for corporates."
Dunn said CUNA's letter was "appropriate for the time" and that looking back and finger pointing does not help in solving the current problems facing the corporate credit unions.
"We want to go forward and see that there are strong solutions and they are structured in a way to limit the impairment of natural person credit unions," she added.
NAFCU Senior Vice President B. Dan Berger also said NAFU is looking ahead but also noted that NCUA could have taken more forceful action if they felt it necessary. "NAFCU is focused on a solution to the corporate problem and trying to get the stabilization fund passed by Congress. But if the regulator thinks it needed additional authority since 2002 it could have promulgated new rules," he said.
The severity of the problems of the corporate credit union system and the costs to credit unions to replenish the NCUSIF has caused a debate about the effectiveness of the NCUA's response or whether it responded too late.
The NCUA is levying a premium to pay for the costs to the NCUSIF resulting from the agency's efforts to stabilize corporate credit unions, these included placing U.S. Central and WesCorp into conservatorship, injecting $1 billion of capital into U.S. Central, and guaranteeing the deposits of all natural person credit unions in corporate credit unions. After placing the two corporates into conservatorship, the NCUA revised the costs of the insurance to $5.9 billion, compared to the initial estimate of $4.7 billion.
The NCUA wants Congress to create a stabilization fund financed by a larger line of credit from the Treasury Department so credit unions can spread out replenishment costs over seven years.
Fazio said more recently his agency took steps to deal with the corporates' financial problem when there were early indications of trouble.
He recalled that last summer and fall, especially after a front-page article in The Wall Street Journal on August 11 brought attention to the corporates' problems to a broader audience beyond the credit union movement, the agency went into "full crisis mode" to deal with the situation.
Last fall the NCUA asked for, and received from Congress, an increase in the cap on the Central Liquidity Facility's lending capabilities. Previously, it was capped at $1.5 billion and the change allowed it to lend money to credit unions based on the formula established in the Federal Credit Union Act, which was estimated to total $41.5 billion.
It also created the Credit Union System Investment Program, under which participating creditworthy credit unions can borrow from the CLF and invest the proceeds in participating corporate credit unions. The CLF has lent $8 billion to credit unions.
He also pointed out that in April 2007, the agency sent a guidance letter to corporates, urging them to closely monitor the risks to their investment portfolio of nontraditional mortgages and noted that at the end of 2006, securities collateralized by real estate totaled 75% of all of the system's marketable securities.
In his letter, the NCUA's director of Office of Corporate Credit Unions at the time, Kent Buckham, said corporates should do a prepurchase analysis to control exposure to credit risk, market value risk and concentration risk to a single originator or servicer.
–cmarx@cutimes.com

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Under Intense Industry Pressure, NCUA Backed Off Earnings Retention in 2003

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