CUNA Regulatory Comment Call
CUNA's Regulatory Advocacy Department
May 3, 1999
CUNA REGULATORY SUMMARY
NCUA Board Approves Prompt Corrective Action Proposal
The NCUA Board today approved a proposed rule to implement the prompt corrective action (PCA) provisions in the Credit Union Membership Access Act (the Act) for federally insured credit unions. Comments must be received by NCUA within 90 days after the proposed rule is published in the Federal Register, which should be around the first week of August.
Proposal in Brief
The document issued by NCUA, including supplementary information, is about 70 pages. (Our summary will be only four!) Under the proposal, a credit union would be classified in one of five capital categories, ranging from well-capitalized at 7% to critically undercapitalized at less than 2% capital. The proposal establishes a system of graduated actions that apply to each capital category below well-capitalized. It details the requirements for a net worth restoration plan, which is required for credit unions with capital levels below 6%, and sets up a separate PCA system for new credit unions. The proposal allows NCUA to take discretionary, as well as mandatory, actions against undercapitalized credit unions. In addition, the proposal establishes an appeals process for credit unions to challenge PCA determinations. NCUA's proposal does not include PCA requirements for "complex credit unions." The NCUA Board plans to propose risk-based net worth requirements for complex credit unions in November.
Net Worth Defined
"Net Worth" means the retained earnings balance of a credit union under generally accepted accounting principles. "Net worth ratio" is the ratio of the credit union's net worth to its total assets. Total assets refers to the average of total assets reported by a credit union on its most recent four quarterly Call Reports or most recent two semi-annual Call Reports.
Net Worth Categories
NCUA has produced a chart depicting the five capital categories and the number of credit unions in each group.
|Category||% of FICUs||# of FICUs|
|Well-capitalized - 7%||94.03%||10,339|
|Adequately capitalized - 6-6.99%||2.80%||308|
|Undercapitalized - 4-5.99%||2.06%||227|
|Significantly undercapitalized - 2-3.99%||0.59%||6|
|Critically undercapitalized - Less than 2%||0.51%||56|
Credit unions that are at least adequately capitalized and meet NCUA's definition of "complex" (yet to be developed) will be subject to risk-based net worth requirements and may be downgraded if they fail to meet those requirements. Credit unions that have a net worth ratio of less than 5% must be downgraded to significantly undercapitalized if they fail to timely file or implement a Net Worth Restoration Plan. NCUA may reclassify a credit union for an unsafe or sound condition or for failing to correct such a condition or practice.
Notice of Category
Credit unions will have notice of their net worth category from their financial statements. The proposal considers a credit union to have notice of its net worth ratio and to be classified within the corresponding net worth category on a quarterly basis, coinciding with the end of the quarterly dividend period or every third monthly dividend period. Once a credit union has notice that it is in a lower net worth category, it must notify NCUA in writing within 15 days.
- Well-capitalized credit unions have no additional PCA requirements.
- Adequately capitalized credit unions must annually transfer to their regular reserves an amount of earnings equal to 0.4% of total assets. According to the proposal, a credit union with a monthly dividend period for regular shares would make monthly transfers of 1/12th of the annual sum and a credit union with quarterly dividend periods would make a quarterly transfer of 1/4 of the annual sum. NCUA may reduce the transfer on a case-by-case basis for credit unions in this category.
- Undercapitalized and significantly undercapitalized credit unions must make the reserves transfer and:
- Restrict total assets to the average of the CU's assets over the last 12 calendar months (unless otherwise approved under a Net Worth Restoration Plan);
- Submit a Net Worth Restoration Plan; and
- Restrict Member Business Loans (unless MBL exceptions apply).
- Critically undercapitalized credit unions are subject to the same PCA requirements as are undercapitalized credit unions and are subject to being placed into conservatorship, liquidated, or other action NCUA may deem appropriate.
NCUA Discretionary PCA
Undercapitalized credit unions and those in the lower net worth categories are also subject to discretionary PCA. NCUA is authorized to impose such discretionary sanctions if it parallels the discretionary PCA powers the bank regulators have established.
- Undercapitalized credit unions could be subject to prior approval for branching and new lines of business; restrictions on CUSO transactions, dividend payments; prohibitions on or reductions in asset growth; reductions or termination of any activity; prohibitions on nonmember deposits (as applicable); or any NCUA requirement that is no more severe. The credit union could also be required to elect new directors; dismiss directors or senior executive officers; or employ qualified senior executive officers.
- Significantly undercapitalized credit unions could be subject to the same discretionary actions and also be required to restrict senior officials' compensation; be merged; or be placed into conservatorship if there is no prospect of becoming adequately capitalized.
- Critically undercapitalized credit unions would be subject to the same actions and could also be required to obtain prior NCUA approval before entering into any material transaction other than in the usual course of business; extending credit for highly leveraged transactions; amending the credit union's charter or bylaws; making any material change in accounting; or paying dividends on new share accounts.
Contents of the Net Worth Restoration Plan
The plan must include:
- Steps the CU will take to become adequately capitalized.
- The timetable for increasing net worth for each year in which the plan is in effect.
- How the CU will meet the PCA mandatory and discretionary requirements imposed on it.
- The type and levels of activities in which the CU will engage.
- The amount of earnings the CU will transfer.
- The steps to correct any safety and soundness practices or conditions.
The proposal incorporates the federal banking regulators' appeals process under PCA.
- For discretionary actions, the credit union will be given advance notice unless the action is necessary to further PCA. The credit union may challenge the action and the NCUA Board will decide the issue.
- For reclassifications, a credit union is entitled to notice and a hearing before an administrative officer who will make recommendations to the NCUA Board. The NCUA Board makes the final decision.
- Similar procedures are permitted in the case of dismissal of a director or officer.
New Credit Unions
A separate PCA system has been devised for new credit unions that recognizes they may operate for some period of time with no real capital and gives them 10 years to reach the "adequately capitalized" level.
Timetable For Implementation
The Act established the timetable for implementation of PCA. A final rule with PCA requirements, except for the risk-based ones for complex credit unions, must be adopted by February 7, 2000 and take effect August 7, 2000. The complex credit union proposal is expected in November; it must be adopted in final form by August 7, 2000 and take effect January 1, 2001.
Comments To NCUA and CUNA
NCUA received only 34 letters in response to its Advance Notice of Proposed Rulemaking on PCA issued last fall. PCA is a critical regulation and credit unions must let NCUA, CUNA and their leagues know what they think about this proposal.
In the next few days, we will be publishing a CUNA Regulatory Comment Call on this proposal, which will provide more details and will compare NCUA's PCA with the bank regulators' PCA requirements. It will also help frame the issues by posing specific questions credit unions should consider in reviewing the proposal.
Comments will not be due to NCUA until after the first days of August (depending on when the document is printed in the Federal Register). However, the sooner comments are filed, the more influence they have with NCUA. We urge credit unions to plan now to comment to CUNA, leagues and NCUA by the end of June so that your views can influence the process.