CUNA Regulatory Comment Call


February 4, 2000

PROPOSED PCA RULE FOR COMPLEX CUs

(Major rule for federally insured credit unions)

Executive Summary

The National Credit Union Administration Board is seeking comments for 60 days on a proposal to define "complex" credit unions and to establish risk-based net worth requirements that might apply to such credit unions, as required by the Credit Union Membership Access Act (Act). These comments are due to NCUA by April 18, 2000. Please submit your comments to CUNA by April 4, 2000. The NCUA Board is required to adopt a final rule on complex credit unions by August 7, 2000 and such rule must take effect January 1, 2001. These requirements would be in addition to other PCA requirements with which a credit union must comply under the final PCA rule. Click here for a copy of NCUA's proposal.

Key Points of the Proposal

TABLE 2 -- §702.104 THRESHOLDS TO DEFINE COMPLEX CREDIT UNIONS

Risk portfolios to define
complex credit unions
Thresholds to define "complex"
(as percent of month-end total assets)
1. Long-term real estate loans 25%
2. Combined portfolios of:
a. MBLs outstanding and
b. Unused MBL commitments
12.25%
3. Long-term investments 15%
4. Loans sold with recourse 5%


TABLE 3 -- §702.105 RBNW COMPONENTS TO CALCULATE RBNW REQUIREMENT

Risk portfolio Amount of risk portfolio (as percent of month-end total assets) to be multiplied by RBNW factor RBNW factor
1. Long-term real estate loans 0 to 25.00%
over 25.00 to 40.00%
over 40.00%
.06
.14
.16
2. MBLs outstanding 0 to 12.25%
over 12.25%
.06
.14
3. Long-term investments 0 to 15.00%
over 15.00%
.06
.12
4. Low-risk assets All % .03
5. Average-risk assets All % .06
6. Loans sold with recourse All % .06
7. Unused MBL commitments All % .06
8. Allowance Limited to equivalent of 1.50% of total loans (expressed as a percent of total assets) (1.00)
A complex credit union’s RBNW requirement is the sum of eight RBNW components. An RBNW component is calculated for each of the eight risk portfolios, equal to the sum of each amount of a risk portfolio times its RBNW factor. A complex credit union is "undercapitalized" if its net worth ratio is less than its RBNW requirement.

TABLE 4 -- §702.106 ALTERNATIVE COMPONENTS FOR RBNW REQUIREMENT

(a) LONG-TERM REAL ESTATE LOANS
Amount of Long-term real estate loans by remaining maturity Alternative factor
> 3 years to 5 years .06
> 5 years to 12 years .08
> 12 years to 20 years .12
> 20 years .16
"Alternative component" is the sum of each amount of the Long-term real estate loans risk portfolio by remaining maturity (as a percent of month-end total assets) times its alternative factor. Substitute for corresponding RBNW component if smaller.
(b) MEMBER BUSINESS LOANS
Amount of Member business loans by remaining maturity Alternative factor
Fixed-rate MBLs
0 to 3 years
.06
> 3 years to 5 years .09
> 5 years to 7 years .12
> 7 years to 12 years .14
> 12 years .16
Variable-rate MBLs
0 to 3 years
.06
> 3 years to 5 years .08
> 5 years to 7 years .10
> 7 years to 12 years .12
> 12 years .14
"Alternative component" is the sum of each amount of the Member business loans risk portfolio by fixed and variable rate and by remaining maturity (as a percent of month-end total assets) times its alternative factor. Substitute for corresponding RBNW component if smaller.
(c) LONG-TERM INVESTMENTS
Amount of Long-term investments by weighted- average life Alternative factor
> 3 years to 5 years .08
> 5 years to 7 years .12
> 7 year to 10 years .16
> 10 year .20
"Alternative component" is the sum of each amount of the Long-term investments risk portfolio by weighted- average life (as a percent of month-end total assets) times its alternative factor. Substitute for corresponding RBNW component if smaller.

QUESTIONS TO CONSIDER

  1. Do you agree with NCUA's basic approach for determining whether a credit union is complex? Do you agree with NCUA's definition of risk portfolios? Do you agree with their assets thresholds? Why do you agree?

























  2. If you do not agree, what are your suggestions for determining "complex?"

























  3. Has NCUA used appropriate risk components to determine risk-based net worth requirements? If you agree, why do you think they are appropriate?



















  4. Has NCUA used appropriate risk-based net worth factors to calculate risk components? Should the risk-based net worth factor be higher or lower? Why or why not?

























  5. If you don't agree, what risk components would you suggest?

























  6. Has NCUA used the correct definition to define long-term real estate loans and investments? Should longer maturities apply to such assets for purposes of including them as risk components? If yes, what should the maturities be?

























  7. For long-term real estate loans, NCUA proposed 25% of total assets threshold. For investments, NCUA proposes a 15% of total assets threshold, and, for loans sold with recourse, NCUA proposed a threshold of 5% of total assets. Are these thresholds appropriate? If not, what should they be?



















  8. Does the alternative component system work in your view? If not, what other alternative components could be added or substitute to improve the system?

























  9. What other changes could NCUA make to improve the complex credit union proposal without ignoring the statute?

























If you have any questions about this summary, please feel free to contact Mary Dunn, Associate General Counsel at (202) 218-7769 or Michelle Profit, Assistant General Counsel at (202) 218-7766.

Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com