Subordinated Debt 2021

 October 28, 2021

Melane Conyers-Ausbrooks
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314

Re: NASCUS Comments on Proposed Rule: Subordinated Debt 2021; Rin 3133-AF 38

Dear Secretary Conyers-Ausbrooks:

The National Association of State Credit Union Supervisors (NASCUS)[1] submits this letter in response to the National Credit Union Administration’s (NCUA’s) proposed rule on Subordinated Debt (Rin 3133-AF 38).[2] If finalized as proposed, the rule would amend NCUA’s 2020 final Subordinated Debt rule (final Subordinated Debt rule) by revising the definition of ‘‘Grandfathered Secondary Capital’’ to include secondary capital issued to the United States Government under an application approved before January 1, 2022, irrespective of the date of issuance.[3] NCUA also proposes to extend the expiration of regulatory capital treatment for these issuances to the later of 20 years from the date of issuance or January 1, 2042.[4] These changes are intended to accommodate the Treasury Department’s implementation of the Emergency Capital Investment Program (ECIP) which is making $9 billion in funding available to qualifying depository institutions to aid underserved communities impacted by the pandemic.[5]

Delays in the administration of the ECIP make it likely that credit unions designated as low-income credit unions (LICUs) with approved secondary capital applications will not receive funding from the Treasury Department until after the January 1, 2022, deadline for the ECIP investments to be considered “Grandfathered Secondary Capital” pursuant to the final Subordinated Debt rule. The proposed changes are necessary to permit LICUs to participate in the ECIP without the unnecessary burden of having to reapply for capital treatment pursuant to the final Subordinated Debt rule after January 1, 2022.

NASCUS supports amending the final Subordinated Debt rule to align the definition of “Grandfathered Secondary Capital” with the ECIP and we encourage NCUA to move forward with rulemaking to do so.

However, additional changes to the final Subordinated Debt rule are needed to maximize the ECIP benefits to LICUs and further reduce regulatory burden.

In the Supplementary Information for the proposed rule, the NCUA states that the agency will not consider any other changes beyond the “narrowly tailored” proposal.[6] We strongly urge NCUA to reconsider, and not to forfeit the opportunity to make necessary additional changes prior to finalizing the Subordinated Debt rule.  An intervening NCUA action already has necessitated at least one more change, and other changes may be needed to accommodate current and future Treasury Department programs and other government-backed funding opportunities for LICUs. Since the publication of the proposed rule, NCUA has issued a supervisory letter clarifying that LICUs may receive 30-year subordinated debt investments from the ECIP.[7] This welcome change in NCUA’s position regarding LICU participation in ECIP is but one example of the need for amendments in the Subordinated Debt rule to properly align NCUA rules with the ECIP. We recommend that NCUA make a conforming change to the regulation, lest the plain meaning of the regulation be read to conflict with the supervisory letter.

Unfortunately, while NCUA will now permit LICUs to accept 30-year subordinated debt investment from the ECIP, the agency maintains that LICUs may only recognize 20 years of capital benefit from the funding. There is no such fixed 20-year maturity limit in the current secondary capital rule for LICUs, and NCUA would be well within the spirit of the new final Subordinated debt rule to allow “Grandfathered Secondary Capital” to maintain the flexibility to set maturity limits based on funding needs and the marketplace. Furthermore, given that the ECIP is administered by the Treasury Department it is improbable that these investments will be mistaken for equity investments in LICUs. Congress specifically authorized the Treasury Department to set the terms of the subordinated debt instruments which the Treasury Department funded, with mutual and cooperative depository institutions in mind. We also note that NCUA cites no authority for the proposition that a term of more than 20 years for subordinated debt would constitute equity. In the 2020, proposed Subordinated Debt rule, NCUA observed that “by its nature, debt has a stated maturity, whereas equity does not.”[8] A 30-year instrument would have a stated maturity, and thus would be consistent with a borrowing – just as a 30-year mortgage loan is a borrowing.

Accordingly, NCUA should amend the final Subordinated Debt rule to allow Subordinated Debt instruments with 30-year maturities. Alternatively, NCUA could permit subordinated debt maturities up to the maximum allowed by a Treasury Department program. As noted above, the Treasury Department’s involvement in the program would prevent the instruments from being mistaken for equity.

In general, the final Subordinated Debt rule should provide for automatic exceptions to accommodate the terms of subsequent emergency government programs. Given the lingering effects of the pandemic, it is likely there could be additional Treasury Department funding programs and NCUA should provide certainty that credit unions will have equal opportunity to participate in those. A basic sunset provision could provide compatibility between the Subordinated Debt rule and the rules of qualifying government funding program.

The changes as proposed will alleviate regulatory burden and improve the prospects of LICUs seeking to participate in the ECIP. We remain concerned however that the proposed changes stop short of what can be done to allow the benefits of the ECIP flow robustly through LICUs to the communities they serve. We encourage NCUA to continue evaluating whether the Subordinated Debt rule is properly calibrated to the distinct features of the LICU ecosystem so as not to impede the important work done by these credit unions.

[1]NASCUS is the professional association of the nation’s 45 state credit union regulatory agencies that charter and supervise over 2,000 state credit unions. NASCUS membership includes state regulatory agencies, state chartered and federally chartered credit unions, and other important stakeholders in the state system. State chartered credit unions hold over half of the $1.97 trillion assets in the credit union system and are proud to represent nearly half of the 126 million credit union members.

[2] “Proposed Rule: Subordinated Debt” 86 Fed. Reg. 53567 (September 28, 2021).

[3] Ibid.

[4] Ibid.

[5] The Treasury Department will provide up to $9 billion in capital directly to depository institutions that are certified Community Development Financial Institutions (CDFIs) or minority depository institutions (MDIs) to provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers, especially in low-income and underserved communities.

[6] 86 Fed. Reg. 53568 (September 28, 2021).

[7] NCUA Letter to Credit Unions 21-CU-11 Emergency Capital Investment Program Participation (Oct. 2021). Available at

[8] “Subordinated Debt” 85 Fed. Reg. 14000 (March 10, 2020).