NCUA Board Upholds FOM Expansion Denial

The National Credit Union Administration (NCUA) Board upheld the denial of a credit union's field of membership (FOM) expansion by the agency's Director of the Office of Credit Union Resources and Expansion (CURE).

As background, an unnamed multiple common bond credit union on January 25, 2019 requested CURE to add the local chapter of an unnamed association to its FOM. CURE on April 5, 2019 notified the credit union that it was deferring action and requested additional information, including whether the local the chapter has a physical location within reasonable proximity of the credit union’s service facility. On May 6, the credit union provided additional narrative and information documenting the chapter's existence and location. On October 29, 2019, CURE denied the FOM expansion request.

There were two reasons for the denial. First, CURE concluded that the local chapter did not exist as a separate legal entity and did not meet the reasonable proximity test. Second, because the group had more than 16,000 members, the group must demonstrate its inability to form its own credit union. CURE stated that the information provided was insufficient to substantiate the group’s claim.

The credit union appealed the denial to the NCUA Board.

In its appeal, the credit union submitted additional evidentiary support and information documenting the local chapter’s existence and the chapter's inability to form its own credit union.

However, the NCUA Board on May 21 affirmed the decision of CURE noting that this new information was not available to CURE during either its initial analysis or its resubmission analysis. The NCUA Board further stated that this Decision and Order does not preclude the credit union from submitting a new FOM expansion request to provide additional, updated information for CURE’s consideration.

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NCUA Board Upholds Denials of Secondary Capital Plans

The National credit Union Administration Board in October upheld the Supervisory Review Committees (SRC) affirmation of the denials of two unnamed low-income credit unions' applications to accept secondary capital by Regional Directors.

In one appeal, the Board on September 9, 2019 denied a request for an oral hearing from a low-income credit union (LICU); but agreed to consider the merits of the appeal on the basis of the written record.

Chairman Hood and Board Member Harper considered this appeal. Board Member McWatters was recused from this matter.

In its October 24 decision, the Board found that there was ample evidence that the LICU's secondary capital plan was unsound.

The Board viewed that the LICU's secondary plan reflected inadequate due diligence.

The pro forma financial statements lacked detail and had material omissions, which did not allow the agency to properly evaluate the safety and soundness of the plan.

Moreover, the secondary capital plan failed to adequately align with the LICU’s forecasts and strategic plan. Specifically, both the Region and the SRC have determined, and the Board agrees, that because there is a negative spread between the projected interest rate for the secondary capital loan and the average rate of return for the assets in the safety net plan, this negative spread will become a stress on earnings and a duration mismatch between funding sources.

The Board concluded the SRC was correct in affirming the Regional Director's denial.

In the other appeal, the Board on August 8, 2019 granted the LICU's request to present its case orally before the Board. The hearing was held on September 24.

Chairman Hood and Board Member Harper considered this appeal. Board Member McWatters was recused from this matter.

The credit union contended that its secondary capital plan that met the criteria in §701.34(b)(1). Therefore it should receive the requested capital. The LICU stated that the three deficiencies identified by the Region were subjective and should not be a valid basis for denying the secondary capital plan.

The Region, on the other hand, argued that the five enumerated criteria provide for the minimum components that are required to be included in a secondary capital application.

The SRC found ample support for the Region’s assessments that the LICU's secondary capital plan was not sound, and concluded the denial of the plan was reasonable.

In its October 11 decision, the Board did not find the LICU's arguments to be persuasive. The Board stated it should not substitute its judgment for the SRC. Therefore, the Board affirmed the SRC decision.

The Board stated that in both cases the credit unions choose to reapply for secondary capital. But if they decide to re-apply, the agency encourages ongoing dialogue to address deficiencies discussed in previous denials.

CUs O-fer in Secondary Capital Plan Appeals to SRC

Credit unions have a zero batting average for secondary capital plan appeals to the Supervisory Review Committee (SRC) of the National Credit Union Administration (NCUA) during the first seven months of 2019.

Five credit unions appealed the denial of their secondary capital plans from the NCUA Region Directors. Four of the appeals involved applications to accept secondary capital and one appeal was to increase the amount of secondary capital accepted by the credit union.

The SRC upheld the denial of the Region Directors in all five cases.

Below are some of the highlights from the SRC decisions.

In several cases, credit unions stated that they met the five requirements of the rule and should be allowed to accept secondary capital. (12 C.F.R. § 701.34) However, the SRC opined that "there is no duty for the Regional Director to approve a secondary capital application simply because the plan meets the five requirements of the rule." The SRC concluded that it is within the authority and discretion of the Regional Director to review the safety and soundness exposure of the credit unions.

The SRC found deficiencies in various credit union's plans, which in some cases were overly simplistic or inadequate. In a couple cases, the credit unions stated the secondary capital was meant to support loan growth without specifying the types of loans the credit union will add to their balance sheets. The SRC believed that subject ambiguity posed a safety and soundness concern.

In one case, the Region Director sought to reduce the amount of secondary capital that the credit union could accept because of safety and soundness concerns due to interest rate risk associated from concentration in real estate secured assets. The Regional Director wanted to reduce the amount of balance sheet leverage at the credit union. In addition, the credit union should not make unsecured secondary capital loans to other credit unions. (Read the decision SRC-03-19).

Another credit union's secondary capital plan posed safety and soundness concerns due to inadequate liquidity risk assessment, incomplete interest rate risk assessment, and no exit or stop-loss strategy. (Read the letter SRC-02-19).

In another decision, the SRC concluded that "the credit union failed to assess key risks arising from the plan’s reliance on high levels of market sensitive wholesale funding (nonmember deposits and borrowing) and deployment of funds into higher risk assets." Here is letter SRC-01-19.

Furthermore, as part of a credit union's board of directors due diligence, the board is expected to address the pros and cons of the specific secondary capital plan, not a generic discussion about the pros and cons of secondary capital. In one case, there was not evidence that the board discussed the specifics of the secondary capital plan.

Read SRC-06-19.

Read SRC-05-19.