NCUA Provides Update on CLF Membership and Borrowing Arrangements at Fed's Discount Window

The National Credit Union Administration's Emergency Liquidity rule required all larger credit unions establish access to
a federal source of liquidity by the end of March 2014.

These federal sources of liquidity are the Federal Reserve’s Discount Window, NCUA’s Central Liquidity Facility (CLF) or both.

According to the 2014 Annual Report of the NCUA, the number of credit unions that were members of the CLF increased from 158
credit unions at the end of 2013 to 248 credit unions by the end of 2014. With the growth in CLF membership, the CLF's borrowing authority increased by $2.2 billion to $5.1 billion.

On the other hand, the number of federally insured credit unions that had arrangements with the Federal Reserve’s Discount Window increased, from 483 in 2013 to 663 by the end of 2014.

Dort FCU Buys Naming Rights to Ice Arena

Dort Federal Credit Union has bought the naming rights to the ice arena in Flint, Michigan.

Perani Arena has been renamed Dort Federal Credit Union Event Center.

Flint Firebirds President Costa Papista announced that IMS Hockey and Arena Corporations of Flint and Genesee County and Flint-based Dort Federal Credit Union have agreed to rename the building. The deal is for 10 years.

Financial terms of the naming deal were not disclosed.

Read the story.

NCUA Charters ELCA FCU

The National Credit Union Administration chartered ELCA Federal Credit Union to serve employees, members, synods and member congregations of the Evangelical Lutheran Church in America.

The Evangelical Lutheran Church in America has almost 4 million members.

The credit union’s headquarters will be located in Chicago and it expects to open in the first quarter of 2016.

This is the third federal credit union to be chartered this year and the first new federal credit union in Illinois since 2006.

Read the press release.

Raising the MBL Cap to 17.5 Percent?

There is a lot of wishful thinking in the credit union community that the National Credit Union Administration (NCUA) through regulatory fiat can raise the member business loan (MBL) cap to 17.5 percent for credit unions with more than $100 million in assets.

According to the Federal Credit Union Act (FCUA), the MBL cap is equal to the lesser of—
(1) 1.75 times the actual net worth of the credit union; or
(2) 1.75 times the minimum net worth required under section 1790d(c)(1)(A) of this title for a credit union to be well capitalized.

The minimum net worth ratio to be well capitalized is 7 percent of assets. Seven percent of assets multiplied by 1.75 equals 12.25 percent of assets.

So, where does the 17.5 percent number come from?

Here is where the wishful thinking occurs.

According to the FCUA, complex credit unions are also subject to a risk-based net worth requirement.

However, NCUA is proposing to replace its risk-based net worth requirement with a risk-based capital requirement. The agency will require a complex credit union to have at least a risk-based capital ratio of 10 percent to be well capitalized. Also, NCUA is proposing to define a complex credit union as an institution with more than $100 million in assets.

According to industry advocates, 1.75 times 10 percent translates into a MBL cap of 17.5 percent.

But there are flies in the ointment with regard to this wishful thinking.

The FCUA links the MBL cap to net worth, not capital. Section 1790d(c)(1)(A) of the FCUA talks about risk-based net worth requirements, not risk-based capital requirements. Furthermore, the components in the numerator of the risk-based capital ratio proposal do not align with the statutory definition of net worth. So, there does not appear to be a legal foundation to use the proposed risk-based capital requirement to determine the MBL cap.

But even if you assume NCUA goes forward, there is still a fly in this ointment. The 10 percent risk-based capital requirement is based upon risk weighted assets, not total assets. So, to be consistent, the MBL limit would equal 17.5 percent of risk weighted assets. As a general rule, risk weighted assets are less than total assets. So, it is likely the 12.25 percent MBL cap would still be binding for most, if not all, complex credit unions.

As I said, this is just wishful thinking on the part of credit unions.

Third-Party Technology Service Providers, Credit Unions and NCUA Oversight

The Government Accountability Office (GAO) in a July 2 report recommended that Congress should consider granting the National Credit Union Administration (NCUA) authority to examine third-party technology service providers for credit unions.

According to the report, credit unions and banks are making extensive use of technology service providers that supply them with IT processing, management, and security. The report notes that the "ability to contract for IT services typically enables an institution to offer customers enhanced services and use infrastructure comparable to that of larger institutions without the expenses involved in owning the technology or maintaining staff to deploy and operate it."

However, when credit unions rely on third-party providers, they may subject themselves to operational and reputational risks if they do not manage these providers appropriately. In addition, smaller institutions may have difficulty in managing their relationships with providers because they lack leverage in their contractual relationships to obtain information to help them determine whether providers have been performing adequately.

GAO further points out that "unlike the bank regulators, NCUA lacks authority to examine third-party service providers, such as technology service providers, on which credit unions often rely to perform critical functions."

NCUA told GAO that it has sought the congressional authority to examine third-party technology providers for a decade, but has so far been unsuccessful. The report highlights that credit union trade associations and organizations that provide third-party services to credit unions have opposed granting NCUA examination authority over third-party providers saying that giving NCUA examination authority is an unnecessary intrusion into these entities’ operations.

To address this inability to examine these third-party service providers, the agency stated it uses other means to monitor and reduce risks to credit unions arising from technology service providers, including making requests to the provider that it submit to a voluntary examination. But the report notes that some providers offering services exclusively to credit union clients have rejected NCUA voluntary examinations.

Unfortunately without supervisory authority over these providers, NCUA cannot enforce any corrective actions. NCUA can only make recommendations and present findings to the credit unions that use those providers.

This means that deficiencies in third-party service providers’ operations can quickly become deficiencies that produce financial and other harm at credit unions.

GAO concludes that to enable NCUA to effectively monitor the safety and soundness of credit unions, the agency should be granted the authority to examine third-party service providers.

SECU to Pay $35 Million for Former BCBS HQ Building

State Employees' Credit Union (SECU) signed a $35 million agreement to buy the former headquarters of Blue Cross and Blue Shield of North Carolina located in Chapel Hill.

SECU plans to upgrade and refurbish the five-story, 240,000-square-foot building – a rhomboid, glass structure – as the home for a new disaster recovery center.

The building will also house a SECU branch.

Read more here:

VAntage Trust FCU Did Not Pay Rent to U.S. Government for Branches

A story appearing in the citizensvoice.com about the Veterans Administration (VA) targeting two branches of VAntage Trust Federal Credit Union for closure noted that the credit union branches have operated rent-free for years.

The article pointed out that the credit union has not paid rent for 62 years at the branch located at the Plains Township VA Medical Center and also has occupied Mundy Street rent-free since opening the branch 17 years ago.

Section 1770 of the Federal Credit Union Act allows for the allotment of space in federal buildings or federal lands rent free to a credit union, if at least 95 percent of the membership of the credit union to be served by the allotment of space or the facility built on the lease land is composed of persons who either are presently Federal employees or were Federal employees at the time of admission into the credit union, and members of their families, and if space is available.

However, there is no policy rationale for providing credit unions with free rent in federal buildings.

Credit unions are private organizations and as private entities, credit unions should be required to pay fair market rents on branches housed in federal buildings and on federal lands.

Taxpayers should no longer be asked to subsidize rent-free credit union branches in federal facilities.

It is time for Congress to repeal Section 1770 of the Federal Credit Union Act.