January 24, 2020

NCUA proposes expanding CUs' use of subordinated debt

NCUA BoardThe NCUA Board Thursday unanimously approved four items during its meeting: A proposed rule that would expand credit unions' ability to issue subordinated debt; a proposed rule to clarify requirements for credit unions seeking to assume liabilities, merge or consolidate with other financial institutions; the extension of the 18 percent loan interest rate ceiling to Sept. 2021; and the agency's 2020 Annual Performance Plan.

Subordinated debt

The board proposed a rule – with a 120-day comment period – to allow low-income credit unions, complex credit unions, and newly-formed credit unions to issue subordinated debt for the purpose of regulatory capital treatment. As a form of regulatory capital, subordinated debt would contribute to a credit union’s risk-based net worth ratio under the RBC rule but would not count towards net worth.

Chairman Rodney Hood during the meeting said this proposal advances the objectives of a plan to explore more flexible capital standards and noted that “55% of all credit unions” are affected by subordinated debt.

NAFCU has long advocated for a subordinated debt rule that allows all credit unions to grow. The association will carefully review the rule and seek member feedback via a Regulatory Alert on how new requirements could impact credit unions.

Credit union combination transactions

The proposed rule related to combination transactions would create a new Subpart D of Part 708a with regulations to clarify and make transparent the procedures and requirements currently in place. Combination transactions include transactions where a federally-insured credit union (FICU) proposes to purchase assets and assume liabilities from a non-credit union, including a bank, and a FICU’s merger or consolidation with a non-credit union entity. The proposed rule will be open for a 60-day comment period after publication in the Federal Register.

As the topic of mergers between FICUs and banks has been prevalent in the last year, Hood indicated that the agency would clarify credit unions' regulatory responsibilities when acquiring banks. NAFCU has worked to educate lawmakersadministration officials, and the public on the facts of these mergers.

Interest rate ceiling

Also during Thursday's meeting, the board agreed to extend the 18 percent loan interest rate ceiling until Sept. 10, 2021. The current rate was set to expire March 11, 2020, and would have reverted to 15 percent without board action. NAFCU continues to advocate for an increased interest rate ceiling to mitigate risk and increase borrowing opportunities, and also encourages the board to explore a floating or a variable interest rate.

2020 Annual Performance Project (APP)

The board approved the 2020 APP, which provides a roadmap for 51 measures and milestones the NCUA has set out to achieve the mission and strategic goals of the 2018-2022 Strategic Plan. Of these goals, Hood acknowledged steady efforts of the NCUA Board towards modernization that includes “modifying, updating, and, in some cases, eliminating regulations that no longer fit todays changing financial system.” NAFCU continues to advocate for transparency and accountability from regulators to ensure efficient use of resources.

Additionally, NCUA staff provided the Board with a briefing on the final rule that adjusts maximum civil monetary penalties (CMP) to account for inflation, clarifying that updating the maximum CMP is intended to maintain the deterrent effect of civil penalties.