Comment on NCUA's Reg Relief Rule

The National Credit Union Administration Board (the Board) proposed a rule extending regulatory relief to all federal credit unions (FCUs) to engage in activities that were previously only granted to FCUs that had received Regulatory Flexibility (RegFlex) designation – FCUs that are well-capitalized and are not supervisory concerns. As a consequence, this proposed rule will extend certain regulatory authorities to undercapitalized and weak FCUs.

While the American Bankers Association (ABA)is supportive of efforts to lower regulatory burdens, ABA believes that it is inappropriate to extend such regulatory relief to FCUs that are undercapitalized or represent supervisory concerns. Specifically, ABA believes the Board should not expand the authorities of undercapitalized FCUs by allowing them to invest in undeveloped land or accept nonmember deposits. Such an expansion could jeopardize the viability of an undercapitalized FCU and pose a risk to the National Credit Union Share Insurance Fund (NCUSIF). Additionally, ABA believes the Board should retain its charitable contribution and donation rule, which it is proposing to eliminate.

Read the letter.

Vystar CU on MBL Personal Guarantees

Under NCUA's regulations, a credit union making a business loan is required to obtain the personal liability and guarantee of the borrower’s principals as part of the rule’s collateral and security requirements. However, a federal credit union that qualified for NCUA's Regulatory Flexibility (RegFlex) program was exempted from this requirement.

However, during the October 21 NCUA Board meeting, the NCUA Board by a 2 to 1 vote rescinded this exemption for qualified federal credit unions along with other exemptions associated with the agency's RegFlex program.

While most credit unions argued for the continuation of the exemption for RegFlex credit unions citing competitive disadvantages, Vystar Credit Union argued that all credit unions that engage in business lending should be required to obtain these personal liability and guarantees.

Esther Schultz, Chairman of the Board of Vystar Credit Union, wrote:

"Our comment is on the changes related to Member Business Lending and requiring a credit union to obtain a personal liability and guarantee of the borrower's principals as part of the rule's collateral and security requirements. As a state chartered credit union we make Member Business Loans and have consistently adhered to the requirement to obtain these personal liability and guarantees. During this challenging economic time, we have found tremendous value in exercising such guarantees and strongly believe that they are critical to making a prudent Member Business Loan decision. Such guarantees have also enhanced our collection abilities in multiple situations, thereby helping to prevent losses to the credit union. Also, when borrowers have balked at agreeing to such requirements, we consider that to be a red flag indicating that additional due diligence is necessary before a loan decision is made."

Esther Schultz goes on to write saying that NCUA needs strength its rules associated with member business loans because of the risk business loans pose to the credit union insurance fund and credit unions.

"We have been making Member Business Loans for a number of years and we believe making them is important for the credit union industry. We also believe that it is important that credit unions engaged in Member Business Lending obtain the expertise to make such loans and service them properly. Each loan decision is unique in its own way and must be carefully evaluated, monitored and serviced after origination. The longer we make Member Business Loans the more we learn about how to improve our related risk management. Otherwise, it is a risk to the National Credit Union Share Insurance Fund and to all credit unions. We encourage NCUA to continue its efforts to strengthen its governance of Member Business Lending to ensure those credit unions doing so are not placing all credit unions at risk. We remain concerned that some credit unions are engaging in Member Business Lending without obtaining proper expertise to underwrite and service such portfolios."

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RegFlex Net Worth Requirements

The National Credit Union Administration (NCUA) in 2002 exempted federal credit unions (FCUs) that have demonstrated sustained superior performance as measured by CAMEL ratings and net worth classifications from certain regulatory restrictions through its Regulatory Flexibility (RegFlex) Program. The agency is now looking to rescind certain RegFlex authorities, because these activities pose a safety and soundness concern. NCUA should also revisit its net worth standard for participation in the program.

In November 2002, the criteria to achieve RegFlex designation were a CAMEL ratings of 1 or 2 for two preceding examinations and net worth ratio of 9 percent or more (200 basis points above the minimum regulatory standard for being “well-capitalized”).

In 2006, the NCUA Board relaxed the net worth portion of the RegFlex qualifications from a minimum 9 percent net worth ratio for one quarter to exceeding a minimum 7 percent ratio for six consecutive quarters. A seven percent net worth ratio is the minimum requirement for being well-capitalized.

This watering down of the net worth standard allowed more credit unions to qualify for RegFlex authority by by-passing certain safety and soundness restrictions. NCUA estimated that at the end of 2004 the change in the net worth standard would increase the number of FCUs qualifying for RegFlex authority from 3,457 to 3,919.

Given the agency's concerns about the risk posed by certain RegFlex powers, it would be appropriate for NCUA to look at raising the net worth standard above the minimum requirement for being well-capitalized and to require an FCU to meet a net worth duration requirement for RegFlex eligibility. This would demonstrate superior capital (net worth) management on the part of the FCU.

It is obvious from the issuance of the the proposed rule by NCUA that some FCUs, through their expanded authorities, have assumed excessive risk relative to their net worth positions.

By imposing a net worth cushion for RegFlex eligibility above the bare minimum for being well-capitalized should significantly reduce the risk to credit unions and the NCUSIF.