Letter to Credit Unions 21-CU-04
Earlier this month, the National Credit Union Administration (NCUA) issued Letter to Credit Unions 21-CU-04 regarding the renewal of certain relief related to NCUA’s prompt corrective action rules. These renewed measures resulted from the issuance of an interim final rule in April 2021 as well as an administrative order issued April 26, 2021 by the NCUA Board. NCUA’s prompt corrective action rules are found in part 702 of NCUA’s rules and regulations. The prompt corrective action rules are designed to address the net worth of federally insured natural person credit unions to mitigate the long-term risk of loss to the National Credit Union Share Insurance Fund and to implement the prompt corrective action requirements set forth in the Federal Credit Union Act. For example, the rules, among other things, address net worth categories (well capitalized, adequately capitalized, undercapitalized, and significantly undercapitalized) and mandatory and discretionary supervisory actions NCUA may undertake depending on a credit union’s net worth classification
The letter renewed two temporary relief measures that had, been approved by the NCUA Board in June 2020 to provide relief for credit unions that “experience a temporary reduction in earnings and regulatory capital ratios due to their COVID-19 response efforts.” Both measures had expired December 31, 2020. Because credit unions are still struggling with the effects of COVID-19, the NCUA Board “decided to reintroduce the two temporary changes to NCUA’s [prompt corrective action] regulations . . . to prevent operational disruptions caused by temporary COVID-19 related conditions.” NCUA’s press release about the April 2021 interim final rule indicated that share growth during the pandemic has led to credit unions having lower net worth ratios. The release quoted Chairman Harper and noted that the relief was designed to “‘provide critical relief so eligible credit unions can focus their limited resources on their members’ needs instead of planning for earnings transfers and developing detailed net worth restoration plans.’”
The first measure permits the NCUA Board to waive the earnings-retention requirements under section 702.201 for credit unions classified as adequately capitalized. Under the general rule, credit unions classified as adequately capitalized or worse “must increase the dollar amount of its net worth quarterly by an amount equivalent to at least 1/10th of a percent of its total assets and must quarterly transfer at least that amount (for a total of 0.4% annually) from undivided earnings to its regular reserve account every quarter until it is well capitalized.” While the general rule also provides a mechanism for credit unions to seek out waivers from the NCUA Board on the earnings-retention requirements, the relief provided by NCUA waives the earnings-retention requirements for adequately capitalized credit unions until March 31, 2022.
The second relief measure relates to net worth restoration plans required by section 702.206 of NCUA’s rules and regulations and the Federal Credit Union Act. The preamble to the April 2021 interim final rule explains that both the act and NCUA’s rules require less than adequately capitalized credit unions to submit net worth restoration plans to NCUA. Section 702.206(c) provides the content requirements for a net worth restoration plan and explains that the net worth restoration plan is supposed to document how a credit union will move from being less than adequately capitalized back to being adequately capitalized. The relief provided by the interim final rule relaxes the content requirements for those credit unions who become undercapitalized (net worth ratio of 4 percent to 5.99 percent) because of share growth. Instead of complying with the prescriptive content requirements in paragraphs (c)(1), (2), and (3) of section 702.206, the relief simply requires a credit union that becomes undercapitalized because of share growth “to attest that its reduction in capital was caused by share growth and that such share growth is a temporary condition due to the COVID-19 pandemic and congressional actions to provide stimulus through direct payments to taxpayers.” The preamble to the interim final rule notes that federally insured state-chartered credit unions should also look to applicable state law for guidance about what might be required for approval by a state regulator. It also describes how a Regional Director will determine whether a decrease in net worth is mainly attributable to share growth. This relief is available until March 31, 2022.