League: NCUA proposed rule’s potential benefits countered by pressure, uncertainty in key provisions
Thursday, July 9, 2020
COLUMBIA and RALEIGH—While it supports the National Credit Union Administration (NCUA) proposed rule on subordinated debt, the Carolinas Credit Union League sees the rule’s one-year expiration of debt and changes to application timing as shortsighted, according to the League’s Wednesday, July 8 comment letter to NCUA Secretary Gerard Poliquin by SVP/General Counsel Jeanne Couchois.
The proposed rule has positive potential, Couchois notes, as it expands eligibility for the source of additional capital beyond Low-Income Credit Unions (LICU) to non-LICU complex and non-LICU new credit unions.
“Alternative capital will provide another source of funds, increasing credit unions’ flexibility for daily operations as they mature and become complex,” she adds. “While we support NCUA’s efforts in drafting this rule, we encourage the agency to revisit several requirements.”
First of those concerns is a one-year expiration of subordinated debt that the NCUA intends as a failsafe in anticipation of material changes in application details. Such changes are unlikely or identifiable in regular call reports and examinations, Couchois notes, adding that the extensive application process coupled with the expiration timeframe could rush a credit union’s strategic consideration and due diligence.
Instead, the League recommends a standard allowing the NCUA to rescind an approval of subordinated debt in the event of a material change in a credit union’s financial condition, given the opportunity for discussion of the agency’s finding.
Second, the NCUA proposed rule adds uncertainty to the application process by extending the current 45-day review period to 60 days, removing automatic approval when the NCUA does not notify an applicant credit union of its status, and allowing regional offices to extend the deadline for additional documentation or incomplete applications. Each proposed change represents potential added cost to the credit union to pursue and receive approval.
Couchois and the League recommend maintaining the current 45-day review period and automatic approval provision.
Together, the provisions of concern are costly and counter to the positive intent of the proposed rule as a whole.
“NCUA published the subordinated debt rule to offer credit unions another way to increase their capital,” Couchois concludes. “As such, CCUL encourages the agency to also consider the costs, time commitment, and burdens the current proposal places on credit unions.”
See details in the NCUA Proposed Rule on Subordinated Debt and the League’s comment letter to the NCUA. For more information on this or other risk, compliance, and governance concerns, contact the League's Risk Management Resources Department.