CUNA Regulatory Comment Call

August 4, 2005

Secondary Capital Accounts for Low Income Credit Unions


Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Associate General Counsel Mary Dunn at and to Senior Assistant General Counsel Jeff Bloch; or mail them to Mary and Jeff in c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at 800-356-9655, ext. 6732, if you would like a copy of the proposed rule, or you may access it here.


In 1996, the NCUA Board amended its rules to authorize LICUs to offer uninsured secondary capital accounts to non-natural person members and nonmembers. This includes state-chartered credit unions to the extent permitted by State law. These rules also require LICUs to discount the net worth value of these secondary capital accounts at the rate of twenty percent per year, beginning at five years prior to maturity.

In 2000 NCUA issued the PCA rules that require credit unions to maintain minimum net worth ratios. However, under PCA, the requirement to discount secondary capital reduces the net worth ratio of the LICU because the secondary capital cannot be redeemed and remains as an asset available to cover losses, even though it is being discounted during the five-year period prior to maturity.


The proposed rule will allow LICUs to redeem the secondary capital accounts under the following conditions in order to prevent the dilution of the LICUs’ net worth that would otherwise occur:

When LICUs seek to offer secondary accounts, they must adopt and send to the appropriate RD a written plan for the use of the funds in those accounts and the subsequent liquidity needs to repay them upon maturity. A state-chartered LICU must also submit the plan to the appropriate SSA. Current rules do not require that the plan be approved before the LICU can offer secondary capital accounts. The proposed rule will now require that the LICU obtain approval of the plan from the RD and/or SSA instead of just requiring the submission of the plan. LICUs may proceed with their plans if the RD and/or SSA does not communicate its decision within 45 days after receiving the request.

The proposed rule also adds the following criteria that these plans must address, in addition to the ones already outlined in the current rules:

This new approval requirement will only apply to plans submitted on or after the effective date of a final rule that implements these requirements. They will not apply to secondary capital plans already existing at that time.

The current rules require that the secondary capital investor sign and receive a “Disclosure and Acknowledgment” form that recites the key terms and regulatory limitations of the secondary capital accounts, along with the terms of the investment. The proposed rule will add a signature block for the investor to sign and date to ensure that this disclosure has been received and signed. Consistent with the proposed rule, the form will also delete the provision barring the redemption prior to maturity and will add language indicating that the LICU has the option to redeem the secondary capital account.


Eric Richard • General Counsel • (202) 508-6742 •
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 •
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 •
Lilly Thomas • Assistant General Counsel • (202) 508-6733 •
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 •