CUNA Regulatory Comment Call
August 4, 2005
Secondary Capital Accounts for Low Income Credit Unions
EXECUTIVE SUMMARY
- The NCUA Board has issued a proposed rule to allow low-income designated credit unions (LICUs) offering uninsured secondary capital accounts to redeem the funds in those accounts at the same rate they are discounted when they are within five years of maturity. Such credit unions are authorized to offer these accounts to non-natural person members and nonmembers.
- LICUs are currently required to discount the net worth value of their secondary capital at the rate of twenty percent per year, beginning five years prior to maturity. However, without the ability to redeem the funds, the result is a dilution of the their net worth ratio, as calculated under the prompt corrective action (PCA) rules.
- The proposal will also require prior approval of a plan for the use of secondary capital before such accounts can be offered.
- Comments are due by September 27, 2005. Please submit your comments to CUNA by September 19, 2005.
Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Associate General Counsel Mary Dunn at mdunn@cuna.coop and to Senior Assistant General Counsel Jeff Bloch jbloch@cuna.coop; or mail them to Mary and Jeff in c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at 800-356-9655, ext. 6732, if you would like a copy of the proposed rule, or you may access it here.
BACKGROUND
In 1996, the NCUA Board amended its rules to authorize LICUs to offer uninsured secondary capital accounts to non-natural person members and nonmembers. This includes state-chartered credit unions to the extent permitted by State law. These rules also require LICUs to discount the net worth value of these secondary capital accounts at the rate of twenty percent per year, beginning at five years prior to maturity.
In 2000 NCUA issued the PCA rules that require credit unions to maintain minimum net worth ratios. However, under PCA, the requirement to discount secondary capital reduces the net worth ratio of the LICU because the secondary capital cannot be redeemed and remains as an asset available to cover losses, even though it is being discounted during the five-year period prior to maturity.
BRIEF DESCRIPTION OF THE PROPOSED RULE
The proposed rule will allow LICUs to redeem the secondary capital accounts under the following conditions in order to prevent the dilution of the LICUs’ net worth that would otherwise occur:
- Obtain approval from the appropriate Regional Director (RD). If state-chartered, the
proposal will also require the LICU to obtain approval of the appropriate State Supervisory
Authority (SSA). The request to redeem must be submitted on an annual basis, unless the RD
indicates in writing that the approval is for more than one year. The LICU may proceed with
the redemption if the RD and/or SSA does not communicate its decision within 45 days after
receiving the request. In the request for approval, the LICU must demonstrate that:
- It is “well capitalized” under PCA, although the RD may grant approval to an LICU that is not “well capitalized” if it is “adequately capitalized” under PCA and meets the other redemption criteria.
- The funds being redeemed have been on deposit at least two years.
- The funds being redeemed will not be needed to cover losses prior to the maturity of the account.
- Its books and records are current and reconciled.
- The redemption will not jeopardize other funding sources. For example, the LICU may receive funding from the Community Development Financial Institutions Fund (CDFI) under the condition that the LICU raise and hold matching secondary capital from another source. In this situation, the LICU may be forced to redeem CDFI funds if it redeems the matching secondary capital.
- The request to redeem was authorized by a resolution of the LICU’s board of directors.
- If the redemption request is approved, the secondary capital is to be redeemed at the same rate that the net worth is being discounted under the PCA rules, which is at the rate of twenty percent per year, beginning at five years prior to maturity.
When LICUs seek to offer secondary accounts, they must adopt and send to the appropriate RD a written plan for the use of the funds in those accounts and the subsequent liquidity needs to repay them upon maturity. A state-chartered LICU must also submit the plan to the appropriate SSA. Current rules do not require that the plan be approved before the LICU can offer secondary capital accounts. The proposed rule will now require that the LICU obtain approval of the plan from the RD and/or SSA instead of just requiring the submission of the plan. LICUs may proceed with their plans if the RD and/or SSA does not communicate its decision within 45 days after receiving the request.
The proposed rule also adds the following criteria that these plans must address, in addition to the ones already outlined in the current rules:
- The LICU must demonstrate that the proposed use of the secondary capital conforms to the LICU’s strategic plan, business plan, and budget.
- The plan must be supported by accompanying pro forma financial statements, including any off-balance sheet items, covering a minimum of the next two years.
This new approval requirement will only apply to plans submitted on or after the effective date of a final rule that implements these requirements. They will not apply to secondary capital plans already existing at that time.
The current rules require that the secondary capital investor sign and receive a “Disclosure and Acknowledgment” form that recites the key terms and regulatory limitations of the secondary capital accounts, along with the terms of the investment. The proposed rule will add a signature block for the investor to sign and date to ensure that this disclosure has been received and signed. Consistent with the proposed rule, the form will also delete the provision barring the redemption prior to maturity and will add language indicating that the LICU has the option to redeem the secondary capital account.
QUESTIONS TO CONSIDER REGARDING NCUA’s PROPOSED RULE ON SECONDARY CAPITAL ACCOUNTS FOR LOW INCOME CREDIT UNIONS
- Do you agree with the six conditions described above that will apply to LICUs that
redeem secondary capital accounts? Are there any that you believe are unnecessary?
- Do you agree with the proposal that will require prior approval, not just submission,
of the LICU’s secondary capital plan? Do you also agree with the two new criteria that
these plans must address, which includes demonstrating that the proposed use of the secondary
capital conforms to the LICU’s strategic plan, business plan, and budget and that the plan
must be supported by accompanying pro forma financial statements covering a minimum of the
next two years?
- Other comments.
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Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com Lilly Thomas • Assistant General Counsel • (202) 508-6733 • lthomas@cuna.com Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com |
