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CUNA Regulatory Comment Call

February 4, 2000

Executive Summary

The National Credit Union Administration Board is seeking comments for 60 days on a proposal to define "complex" credit unions and to establish risk-based net worth requirements that might apply to such credit unions, as required by the Credit Union Membership Access Act (Act). These comments are due to NCUA by April 18, 2000. Please submit your comments to CUNA by April 4, 2000. The NCUA Board is required to adopt a final rule on complex credit unions by August 7, 2000 and such rule must take effect January 1, 2001. These requirements would be in addition to other PCA requirements with which a credit union must comply under the final PCA rule. Click here for a copy of NCUA's proposal.

Key Points of the Proposal

• The Act requires NCUA to develop the definition of a "complex" credit union based on the risk level of a credit union's portfolio of assets and liabilities.



• The law also mandates that a credit union which qualifies as "complex," and is adequately or well-capitalized must meet any applicable risk-based net worth requirement to stay in that category. Otherwise, the credit union is considered undercapitalized and subject to supervisory action.



• A credit union that is not well-capitalized but is complex will have to meet any applicable risked-based net worth requirement to be considered adequately capitalized.



• A complex credit union is undercapitalized if its net worth ratio is less than its risk-based requirements.



• This rule would apply to all federally insured credit unions, including those that are new, if deemed to be complex based on the proposal's standards.



• The proposal departs from NCUA's original approach which was to define complex credit unions based on their loan or investment portfolios only and then require an additional net worth requirement if a credit union were deemed to be complex. While CUNA supported a system that would be simple to use, we urged NCUA not to utilize this kind of one-size-fits-all approach.



• The proposal implements a multi-step process to assess whether a credit union is complex and whether it would have additional risk-based net worth requirements.




The first step requires a credit union to determine if it is "complex." A credit union is complex if the credit union's assets are greater than the threshold percentage of assets that are allowed for a particular risk portfolio. There are four thresholds. A credit union is complex if:





more than 25 percent of its assets are in the long-term real estate loan portfolio; or





more than 12.25 percent of its assets are in the combined member business loan risk portfolio; or





more than 15 percent of its total assets are in the long-term investment portfolio; or





more than 5 percent of its total assets are in the loans sold with recourse portfolio.





NCUA's table illustrates the thresholds to define complex components.

TABLE 2 -- §702.104 THRESHOLDS TO DEFINE COMPLEX CREDIT UNIONS

Long-term real estate loans are total real estate loans and lines of credit, exclusive of those that will contractually refinance, reprice or mature within three years and exclusive of all member business loans.





Long-term investments are fixed rate investments with a weighted average life greater than 3 years; variable rate investments with the next rate adjustment period greater than 3 years; or investments in a collective investment fund or registered investment company.





• If a credit union does not meet any of these tests, it is not complex and the rule does not apply.



• If a credit union does not meet any of these tests, it is not complex and the rule does not apply.



• The second step uses risk-based net worth components to calculate risk-based net worth requirements that a credit union must meet.




There are eight risk-based net worth components. The credit union's assets in each particular component are multiplied by a corresponding risk factor. The sums of these calculations are added together and the total provides the risk-based net worth requirement the credit union must meet.

• NCUA's Table illustrates how this would work.

TABLE 3 -- §702.105 RBNW COMPONENTS TO CALCULATE RBNW REQUIREMENT

• The Allowance for Loan Losses is weighted by negative 100%, and would reduce the risk-based net worth requirement that otherwise would result from the aggregate of the other seven risk components addressed above.



• The third step allows a "complex" credit union the option to try to reduce the amount of the risk-based net worth requirement previously calculated in step two. This step allows a credit union to substitute any of three components listed above with a corresponding "alternative component" that may lower the overall risk-based net worth requirement. The long- term real estate loans, member business loans and long-term investments portfolios each have an "alternative component."



• NCUA's table demonstrates how the use of the alternative components would be used.

TABLE 4 -- §702.106 ALTERNATIVE COMPONENTS FOR RBNW REQUIREMENT

• The risk-based net worth calculation will be made in conjunction with when a credit union files its Call Report. If a credit union files its report quarterly or semiannually then its calculation is made at the same intervals.



• Under NCUA's proposal, approximately 1,490 credit unions would be considered complex and about 31 would be required to actually hold additional, risk-based net worth.



• Click here for tools that will help you calculate whether your credit union is complex, determine what are your risk-based requirements, if any, and show you how to use the alternative components to reduce your requirements.

1. Do you agree with NCUA's basic approach for determining whether a credit union is complex? Do you agree with NCUA's definition of risk portfolios? Do you agree with their assets thresholds? Why do you agree?






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2. If you do not agree, what are your suggestions for determining "complex?"






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3. Has NCUA used appropriate risk components to determine risk-based net worth requirements? If you agree, why do you think they are appropriate?






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4. Has NCUA used appropriate risk-based net worth factors to calculate risk components? Should the risk-based net worth factor be higher or lower? Why or why not?






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5. If you don't agree, what risk components would you suggest?






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6. Has NCUA used the correct definition to define long-term real estate loans and investments? Should longer maturities apply to such assets for purposes of including them as risk components? If yes, what should the maturities be?






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7. For long-term real estate loans, NCUA proposed 25% of total assets threshold. For investments, NCUA proposes a 15% of total assets threshold, and, for loans sold with recourse, NCUA proposed a threshold of 5% of total assets. Are these thresholds appropriate? If not, what should they be?






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8. Does the alternative component system work in your view? If not, what other alternative components could be added or substitute to improve the system?






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9. What other changes could NCUA make to improve the complex credit union proposal without ignoring the statute?






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If you have any questions about this summary, please feel free to contact Mary Dunn, Associate General Counsel at (202) 218-7769 or Michelle Profit, Assistant General Counsel at (202) 218-7766.