Board OKs final rule on corporate CUs; leaves out sub-debt portions (for now)

A final rule on corporate credit unions that is generally aimed at clarifying a number of provisions in NCUA’s rules was approved unanimously by the agency’s board Thursday.

In other action, the board issued a proposal on credit union investments in derivatives, and heard a staff report on cybersecurity issues (see following item). A proposed request for information (RFI) on supervisory guidance review and improvements in communications was removed from the board’s agenda; Chairman Rodney Hood announced the board members agreed to remove the proposal.

The final corporate rule, NCUA said, addresses five key areas in the existing rules. The new regulation:

  • permits a corporate credit union to make a minimal investment in a credit union service organization (CUSO) without the service organization being subjected to heightened agency oversight;
  • expands the categories of senior staff positions at member credit unions eligible to serve on a corporate credit union’s board;
  • removes the “experience and independence” requirement for a corporate CU’s enterprise risk management (ERM) expert;
  • clarifies the definition of a collateralized debt obligation;
  • simplifies the requirement for net interest income modeling.

The final rule incorporates most of the recommendations that the state system, through NASCUS’ comment letter, offered to the agency. “Broadening eligibility of natural person credit union senior staff to serve as board members should expand access to highly relevant expertise,” NASCUS President and CEO Lucy Ito said, underscoring the association’s support for the provision, and the fact that six of 11 corporate credit unions are state-chartered. “And, enabling corporate CUs to make minimal investments in a CUSO without triggering a ‘corporate CUSO’ classification should enable the credit union system to stay abreast of broader fintech developments,” she said.

NASCUS’ recommendation not to include a provision from the proposal is also reflected in the final rule. That is: removing approved corporate activities from the agency’s website and, instead, incorporating the activities into the regulation as an appendix. NASCUS advised the agency that the administrative process of making that change would add delay and hamper the ability of corporate credit unions to obtain timely determinations of proposed new activities. NCUA, in its final rule, noted that no commenters supported the change – and thus decided to drop it.

The final rule also makes some changes with regard to proposed subordinated debt offerings by credit unions. NCUA had proposed including a definition of the debt instrument (a method for bolstering capital positions for some credit unions) in the corporate rule, as a way of setting the stage for a subsequent final rule on subordinated debt instruments offered by credit unions. (A proposal was issued in January on subordinated debt; the comment period ended in July.) The corporate rule had also proposed requiring corporate credit unions to deduct from their tier 1 capital any subordinated debt instruments they purchased from credit unions, to protect the capital position of the corporates.

However, NCUA decided to remove both of those provisions from the final rule, noting that both sections would be addressed in a final rule on subordinated debt. The agency added that it does not envision any changes to the proposed definition.

NASCUS’ Ito said the state system looks forward to discussion with the agency about corporate CU participation in subordinated debt as the agency moves toward a final rule on the subject.

Also during the Thursday meeting, NASCUS’ comment letter on the proposed corporate rule earned a shout-out from Board Member Todd Harper, who noted the state system’s support for allowing minimal investment by corporates in CUSOs.

NCUA Final Rule, Part 704, Corporate Credit Unions