Jan. 24, 2020 NASCUS Report

THIS WEEK: In 2020’s first meeting, NCUA: issues sub debt proposal (which states appreciate, urge collaboration) … proposes clarifying bank acquisition rules (as states urge limited authority); Agency names new exec director, other staff changes; ON THE ROAD: Celebrating an ID legend’s career; BRIEFLY: FCU loan rate ceiling set; agency names Western Region ops director; transition in LA

In first, key session for 2020,
NCUA proposes sub debt rule

The NCUA Board’s first session of 2020, held on Thursday, may be seen in coming months as one of the most consequential meetings of the year, as the board unanimously voted to issue two significant rule proposals on capital and credit union acquisitions of banks.

A 275-plus page proposal on allowing some federally insured credit unions to build capital through subordinated debt in order to help them meet their risk-based capital requirements was issued for a 120-day comment period (as NASCUS recommended). The other proposal, on credit union “combination transactions” (or acquisition of banks or their assets), was issued for a 60-day comment period (for more on that proposal, see the third item below).

NASCUS has long held that subordinated debt should be a part of the risk-based capital framework because it encourages well-managed credit unions to attract additional loss-absorbing forms of capital that they would otherwise forego. NASCUS President and CEO Lucy has noted that the risk-based capital rulemaking itself is intended to increase the capital buffer standing of a credit union before the share insurance fund, and that subordinated debt is consistent with that goal.

Those opposing the proposal (mostly from the banking industry) argue that the plan would increase risk to the financial system and taxpayers. NCUA Board members, at Thursday’s meeting, countered those claims by noting the proposal increases the incidence of capital in the credit union system, thus making the system stronger and reducing risk to the National Credit Union Share Insurance Fund (NCUSIF).

Among the key provisions of the subordinated debt proposal are that it:

  • Permits low- income designated credit unions (LICUs), complex credit unions (applying to their risk-based capital requirements), and new credit unions to issue subordinated debt for purposes of regulatory capital treatment.
  • Allows for a maximum maturity of 20 years to be imposed on debt issued (with a minimum maturity of 5 years), and a minimum denomination of $100,000. The agency noted maturity limit helps to clarify that the financial instruments issued are debt – and not equity in the credit unions (which are solely owned by the members; credit unions do not issue stock).
  • Prohibits a credit union from being both an issuer and investor, unless the credit union meets certain conditions related to mergers
  • Adds a new section addressing new rules and limits for making loans to other credit unions, including investing into subordinated debt at those credit unions.
  • Includes an expansion of the borrowing rule to clarify that federal credit unions can borrow from any source.
  • Makes revisions to the final risk-based capital (RBC) rule and the payout priorities in an involuntary liquidation rule to account for subordinated debt and grandfathered secondary capital where applicable.
  • Inserts cohering changes to part 741 of agency rules to account for the other changes proposed in this rule that apply to federally insured, state-chartered credit unions.

In discussing the proposal with the board, agency staff noted that federally insured, state-chartered credit unions (FISCUs) would be eligible for applying to issue subordinated debt if their state laws and rules allow it.

The agency also estimated that the cost of adopting and implementing the proposal would be about $1 million a year, which would include adding two senior staff with securities law experience and retaining outside counsel about securities law. The agency said it expects, if the rule is finalized, to see a shift in subordinated debt applications from low-income credit unions to applications from complex credit unions – applications, the agency said, which will necessarily be more complicated.

NCUA said it adopted the relatively long 120-day comment period (rather than a more typical 90-day period) to account for the complex nature and length of the proposal. At 277 pages, the proposal is one of the longest the agency has ever published.

Both Board Chairman Rodney Hood and Board Member Todd Harper noted that NASCUS had specifically urged the board to issue the proposal for a 120-day comment period. Both also said they agreed with NASCUS’ approach, which NASCUS President and CEO Lucy Ito advocated in a Jan. 17 letter to all three board members. In the letter, Ito said the longer comment period was warranted to “allow state supervisory authorities (SSAs) and all stakeholders the opportunity to fully contemplate the complexity of the subordinated debt concept and its related issues.”

Board Member J. Mark McWatters (who is credited with spearheading the subordinated debt proposal effort) also indicated the long-time support of the state system for the proposal during his remarks.

According to the agency, there are 2,628 LICUs (complex and non-complex) that are “currently eligible” for subordinated debt under the new rule (LICUs may already build regulatory capital from outside sources). The new rule would open the door to 285 additional non-LICU, “complex” credit unions (281 existing, “complex,” and an estimated four new credit unions) to be eligible to take advantage of the new rule.

NCUA said up to 2,409 non-complex (and non-LICU) credit unions would not be eligible to issue subordinated debt.

Staff presentation: Subordinated Debt Notice of Proposed Rulemaking

Proposed rule: Subordinated Debt

Ito: States appreciate board’s support, urge collaboration

In a press statement following Thursday’s action, NASCUS’s Ito thanked all three NCUA Board members for their work in advancing the proposal. “We appreciate Board Member McWatters’s continued efforts to bring subordinated debt to the NCUA Board table and we applaud Chairman Hood and Board Member Harper’s support for an extended comment period of 120 days which will allow state supervisory agencies and all stakeholders the opportunity to thoroughly examine the lengthy and complex proposed rule,” Ito said.

Ito also urged the agency to collaborate with state regulators on the proposal during the comment period, following past precedent. “Two decades ago, NCUA, state regulators and a NASCUS liaison successfully worked together to draft the original Prompt Corrective Action rules and implement H.R. 1151 (the Credit Union Membership Access Act (CUMAA), which assured credit unions could continue to add members through fields of membership). We believe the past collaboration is a proven blueprint for the path forward,” she said.

2nd proposal would clarify rules for bank acquisitions

Also issued for comment by the NCUA Board Thursday: A new rule intended to clarify requirements for a federally insured credit union (FICU) when it proposes to acquire or merge with a bank or other institution.

In proposing the rule, the agency noted that credit union acquisitions of banks – which, historically, have been rare occurrences – has seen an uptick recently. For example, the proposal includes a chart showing 15 credit union acquisitions in 2019 (for all or part of another institution’s assets and liabilities) – and 17 already pending for 2020. Between 2013 and 2017, according to the NCUA numbers, only 20 such transactions were made.

“Because of a desire to add even more transparency, and the questions the NCUA has received recently from FICUs, the Board believes it would be beneficial to clarify the processes and requirements related to FICU applications for these transactions,” the agency wrote in its proposal. “This increased transparency will assist FICUs seeking to engage in these transactions to meet the NCUA’s requirements.”

However, the uptick in credit union acquisitions has raised the objection of some in the banking industry, who have called credit union acquisition of banks “yet another example of how credit unions are pursuing aggressive growth opportunities while falling short of their statutory mission to serve households of small means.”

NCUA Chairman Rodney Hood said he brought the proposal forward following requests for clarity about credit union bank acquisitions from both credit unions and banks. He said the proposal will provide the clarity for credit unions, for example, without imposing “undue burden” on them.

The proposal includes provisions that:

  • Specify the basic requirements applicable to the acquisitions (called “combination transactions” by NCUA) between an FICU and bank.
  • All transactions require NCUA approval, and federally insured, state-chartered CUs (FISCUs) must also obtain their state regulator’s approval. Included in that process, the proposal states, is a requirement that NCUA consider the proposed transaction’s effect on FICU members and potential FICU members. The agency must also consider whether the proposed transaction is in keeping with the FICU’s mission, according to the proposal. “Accordingly, the NCUA reserves the right to object to a transaction, or portions of a transaction, even absent safety and soundness concerns,” the proposal states.
  • Ensure that the directors of an FICU proposing a combination transaction understand the nature and ramifications of the proposed transaction, including how the transaction will affect the credit union’s net worth, how the credit union determined the purchase price, and how the transaction would benefit current members.
  • Amend the agency’s rule (under section 741.8) to make its provisions applicable to all asset purchases in the transaction and list the other NCUA regulations that apply to each particular type of transaction.

Proposed rule: Combination Transactions with Non-Credit Unions; Credit Union Asset Acquisitions

NCUA authority should be limited, states believe

NCUA should confine itself to safety and soundness issues with regard to states and credit union bank acquisitions  – and not governance of credit unions, NASCUS’ Ito said in a press statement following the agency’s decision about the NCUA Board proposal.

“A credit union makes a business decision when deciding whether to acquire a bank,” Ito said. “The role of state regulators and NCUA is to ensure that the resulting entity from a credit union’s acquisition of a bank is safe and sound and adequately capitalized. For state-chartered credit unions, NCUA’s authority should be limited to safety and soundness concerns and should not extend to governance questions which are the purview of state regulators.”

The NASCUS leader noted that the association is still reviewing the proposed rule to determine its impact on the state credit union system. “We look forward to engaging with NCUA to offer insights, as state agencies have evaluated a greater number and variety of these transactions,” she said.

NCUA names Fazio executive director, outlines other changes

A new executive director – the highest staff position – for NCUA was named late Thursday, following the announcement of the retirement of the current incumbent in the position. The agency also announced it has named a new deputy executive director and chief operating officer.

Larry Fazio will succeed Mark Treichel as NCUA’s executive director, the agency said in a release. The transition begins March 1. Fazio is now director of the agency’s office of examination and insurance, which oversees supervision and the federal credit union savings insurance fund.

Fazio is a 29-year veteran of the agency. According to NCUA, he has served as a supervision analyst, a supervisory examiner in Detroit, the director of supervision in the former-Chicago regional office, the director of risk management, the Deputy Director and Director of the Office of Examination and Insurance, and the NCUA’s Deputy Executive Director. He graduated from Lewis University with a degree in accounting, and he has a master’s degree in organizational management from The George Washington University in Washington D.C.

Treichel has served as executive director of seven years; he has worked at the agency for more than 33 years. According to NCUA his retirement is effective June 30 “to allow for a smooth transition in leadership.”

Meanwhile, the agency also announced Rendell Jones will be the agency’s deputy executive director and chief operating officer, effective Feb. 2. Jones, now the agency’s chief financial officer, has nearly a quarter-century service in the federal government, serving in the U.S. Citizenship and Immigration Services, Department of Homeland Security and Department of Justice.

Other personnel changes announced Thursday by the agency include:

  • Current NCUA Deputy Executive Director John Kutchey will be the agency’s regional director for the eastern region, as of Feb. 2. Kutchey has served in his current position for eight years.
  • Towanda Brooks, director of the agency’s office of human resources, will be chief human capital officer for the agency. She will assume her expanded duties on Feb. 2, the agency said.
  • Current Acting General Counsel Frank Kressman will continue to fill that role, which he started late last year in a short-term detail. The agency indicated it is still searching for to fill the general counsel’s position permanently. He is a former deputy general counsel; he joined the agency in 1998.
  • Meanwhile, Linda Dent – now serving as acting deputy general counsel – will continue to serve in that role (also after serving in a short-term detail). She is a former associate general counsel for information and access law, where the agency said she established a new office focused on federal information laws and practices. She joined the agency in 2006.

Fazio Named New Executive Director, Others Named to Key Positions

ON THE ROAD: In ID, celebrating retiring Mary Hughes’ career

Retiring Idaho Department of Finance Acting Director Mary Hughes (center) was feted at a gathering this week in the Gem State (sponsored by the Northwest Credit Union Association (NWCUA) and attended by NASCUS’ Lucy Ito (also pictured in NWCUA President and CEO Troy Stang). Hughes, who served nearly 30 years with the state agency, was succeeded as director by Patti Perkins, who has nearly 30 years’ banking experience in both business and human resources roles. Hughes had also served as a NASCUS officer and director, participating in several NASCUS committees and taskforces – including as a member of the NASCUS Regulator Board of Directors from 2009-13 and as a member of the association’s Legislative and Regulatory Committee since 2006.

BRIEFLY: Board sets loan rate ceiling; Western Region operations director named; Transition in LA

Also at this week’s meeting, the NCUA Board voted unanimously to continue the 18% loan interest-rate ceiling in effect for loans made by federal credit union loans for another 18 months. The cap has been set temporarily at 18% since 1987, with the NCUA Board voting for its continuation now 22 times since then. Without the board’s action, the interest-rate cap for FCU loans would drop back to 15% by March 11. The temporary cap approved Thursday keeps the FCU loan interest-rate ceiling at 18% through Sept. 10, 2021 … The associate regional director of operations for the NCUA’s Western Region assumed her new role Jan. 5, the agency said in a release this week. NCUA said Julie Cayse took on the job after serving as director of risk management in the agency’s Office of Examination and Insurance. She has also served as a supervision analyst, supervisory examiner, and director of supervision since joining the agency in 2010. Her new role is in the agency’s Western Region office in Tempe, Ariz. … John (“JD”) Fields is retiring from the Louisiana Office of Financial Institutions (LOFI). He is a former member of the NASCUS Regulator Board and the NASCUS Education Committee.

Cayse Named Western Region Associate Regional Director of Operations

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