Proposed Rules Issued: Subordinated Debt; CU-Bank Purchases

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The latest National Credit Union Administration (NCUA) board meeting.
The latest National Credit Union Administration (NCUA) board meeting.

The National Credit Union Administration (NCUA) Board unanimously approved a proposed rule to permit low-income designated credit unions (LICUs), Complex Credit Unions (>$500 million in assets), and New Credit Unions (<10 years in operation and $10 million or less in assets) to issue Subordinated Debt for purposes of Regulatory Capital treatment. The proposed rule would create a new subpart in the NCUA’s final risk-based capital (RBC) rule that would address the requirements for and Regulatory Capital treatment of Subordinated Debt.

All secondary capital issued after the effective date of a final rule would be subject to the requirements for subordinated debt. In addition, the proposed rule does not impact a LICU’s ability to include such instruments in its net worth.

Two of the objectives of the proposed rule are to provide responsible regulatory relief by authorizing New and Complex Credit Unions to issue Subordinated Debt and to make other improvements and provide additional flexibility for LICUs use of Secondary Capital. According to the NCUA, there are 281 complex credit unions and 4 new credit unions that are non-LICUs and thus could benefit from the propose rule. The NCUA noted the following components of the proposed rule:

Regulatory Relief or New Authority
Six areas:

  • 1) Expands eligibility to issue Subordinated Debt to include Non-LICU Complex CUs, CUs that anticipate being a LICU or Complex in 24 months, and Non-LICU NEW CUs. (702.403).
  • 2) Expands eligible investors for Subordinated Debt from Institutional investors to Accredited Investors (702.406).
  • 3) Adds flexibility for multiple issuances without reapplying (702.408).
  • 4) Adds flexibility on repayment amount (702.411).
  • 5) Adds flexibility to retain Subordinated Debt through a merger or dissolution (702.412).
  • 6) Provides new Safe Harbors for repudiation, interest payments (702.410 and 702.413).

Retained, Clarifications and Cohering Changes
Five areas:

  • 1) Borrowed Funds rule revised to permit borrowing from “any source” to align with the FCU Act (701.38).
  • 2) Preapproval Requirements including the Initial Application and Prepayment have been expanded for clarification (702.408 and 702.411).
  • 3) Regulatory Capital Treatment (702.407).
  • 4) Payout Priorities in involuntary liquidation (709.5).
  • 5) Applicability to Federally Insured State Chartered CUs (741.226 and 741.227).

Proposed New Requirements
Six areas:

  • 1) Defined maximum maturity of 20 years (current minimum maturity of 5 years is retained) (702.404).
  • 2) Subordinated Debt Note requirements are largely retained with additions for restrictions, covenants, default and minimum denomination of $100,000. (702.404).
  • 3) Prohibition on being an issuer and investor, unless the credit union meets certain conditions related to mergers (702.403).
  • 4) Expanded requirements for Disclosures and new requirements for Offering Documents (702.405, 702.406 and 702.408).
  • 5) New rules and limits for making loans to other credit unions including investing into Subordinated Debt (701.25 and 741.227).
  • 6) Prohibition of Interest Payments on “Undercapitalized” credit unions to mandatory (702.109 and 702.410).

In addition to the new and clarified authorities, the NCUA notes that the complexity of the Securities Law component will require NCUA to augment and support legal staff. They propose to hire two senior staff with Securities Law experience and to augment legal staff with outside counsel at an estimated cost of $1 million a year. The proposed rule will expand authority to approximately 285 credit unions and NCUA estimates the volume of new applications to be between 20 and 40 applications per year, with a shift from only LICUs to complex credit unions.

Comments on the proposal will be due 120 days after publication in the Federal Register. A 120-day comment period is meant to provide all stakeholders the opportunity to fully consider the complexity of the subordinated debt proposal and its related issues. A summary of the proposed rule will be available soon in PowerComment. The NCUA has also published the Board’s briefing presentation, which includes a section-by-section outline of the proposal.

Credit Union Combination Transactions Proposed Rule
The Board unanimously approved a proposed rule to add new Subpart D to Part 708a to clarify and make transparent the procedures and requirements currently in place related to “combination transactions,” that is: (a) transactions where a FICU proposes to assume liabilities from an institution other than a credit union, and (b) a FICU’s merger or consolidation with an entity other than a credit union. The proposed rule also adds cross-references to Part 741.8, to clarify its scope and applicability to the purchase of assets and assumption of liabilities by FICUs.

The proposed rule provides more information about what the NCUA needs in order to approve or disapprove these transactions; lists the circumstances under which the deposits qualify for share insurance, and explains the process for making the customers of the other financial institution members of the FCU.

Comments on the proposal will be due 60 days after publication in the Federal Register. A summary of the proposed rule will be available soon in PowerComment.

Federal Credit Union Loan Interest Rate Ceiling
The Board also addressed the interest rate ceiling for FCU loans. Under the FCU Act, the interest rate may not exceed 15 percent except that the Board may establish, after consultation with Congress, Treasury, and other federal financial agencies, a temporary interest rate ceiling greater than 15 percent for periods up to 18 months. The Board extended the temporary 18 percent interest rate ceiling for FCUs through Sept. 19, 2021.

The interest rate ceiling has been set at a fixed 18 percent since 1987. The Board did not consider alternative possible methods for setting the temporary interest rate ceiling, such as a variable or floating rate, at this meeting. However, Chairman Hood acknowledged this topic has been delayed behind other Board priorities but is still on the NCUA’s rulemaking agenda.

2020 Annual Performance Plan
The Board unanimously approved the 2020 Annual Performance Plan. The plan sets out performance indicators and associated targets in support of the goals outlined in the agency’s Strategic Plan and is intended to draw a clear line from the agency’s mission to the strategic goals, strategic objectives, performance goals, and performance indicators and targets. The plan also describes the means, strategies and specific actions the agency has resourced and intends to undertake to achieve each strategic objective.

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