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Board Proposes Rules on Subordinated Debt, Combination Transactions

January 2020
Board Proposes Rules on Subordinated Debt, Combination Transactions

Board Action Bulletin

2020 Annual Performance Plan, CMP Adjustments, Interest Rate Ceiling Approved

ALEXANDRIA, Va. (Jan. 23. 2020) – The National Credit Union Administration Board held its first open meeting of 2020 at the agency’s headquarters today and unanimously approved four items:

  • A proposed rule to permit low-income-designated credit unions, complex credit unions, and newly chartered federal credit unions to issue subordinated debt.
  • A proposed rule that provides greater clarity on the regulations governing transactions where a federally insured credit union proposes to assume liabilities from or merge with another institution that is not a credit union.
  • The 2020 Annual Performance Plan, which outlines the strategies and initiatives the NCUA will use to achieve the performance measures and outcomes described in the 2018–2022 Strategic Plan.
  • An extension of the current 18-percent interest ceiling on most federal credit union loans until September 2021.

The Office of the General Counsel briefed the Board on inflation adjustments required by federal law to the agency’s civil monetary penalties.

Proposed Rule Would Update Authority to Issue Subordinated Debt

The NCUA Board approved a proposed rule that would update its regulations to allow eligible credit unions to issue subordinated debt for regulatory capital standards.

“Federal credit unions borrowing in the form of subordinated debt is squarely within the statutory authority provided under law,” NCUA Board Chairman Rodney E. Hood said. “I support giving complex credit unions the authority to use subordinated debt prudently as an additional tool to comply with risk-based capital requirements and newly chartered credit unions the ability to use this tool to get up and running.”

The proposed rule would better organize certain NCUA regulations, improve clarity and transparency, and incorporate enhanced investor protections. The rule would amend parts of the NCUA’s regulations to update the authority low-income-designated credit unions have to issue subordinated debt. The rule also would authorize complex credit unions subject to the agency’s risk-based capital requirements and new credit unions to use subordinated debt under certain circumstances.

In particular, the proposed rule would:

  • Add a new section to NCUA’s regulations addressing limits on loans to other credit unions;
  • Clarify application requirements to issue subordinated debt;
  • Expand requirements for note disclosures and offering documents;
  • Update the borrowing rule to clarify that federal credit unions can borrow from any source; and
  • Add new safe harbors for repudiation and interest payments.

Any secondary capital issued before the effective date of a final rule would be grandfathered under the new rule.

Comments on the proposed rule must be received no later than 120 days after publication in the Federal Register.

Proposed Combination Transactions Rule Clarifies Requirements

Federally insured credit unions interested in merging with or assuming liabilities of financial institutions that are not credit unions would benefit from greater clarity about that process under a Board-approved proposed rule.

“The number of credit union acquisitions of bank assets and certain liabilities is small relative to any standard,” Chairman Hood said. “As we continue to see the evolution in the marketplace, one of my priorities as Chairman is to be forward-thinking. Credit unions as well as banks have asked for clarity on this process. I am glad the Board is considering this rule to add even more transparency to the process, and I welcome the public’s comments.

“Additionally, credit union acquisitions of banks may be particularly beneficial for underserved and rural areas, which have seen a severe contraction in access to financial services over the last decade as financial institutions shut down branches,” Hood said.

The proposed rule adds a new Subpart D to Part 708(a) of the NCUA’s regulations that:

  • Simplifies the basic requirements that apply to combination transactions between a federally insured credit union and another type of financial institution;
  • Ensures that the directors of a federally insured credit union proposing such a transaction understand the nature and ramifications of the proposed transaction; and
  • Makes regulatory provisions applicable to all asset purchases and lists other NCUA regulations that apply to each particular transaction.

All such transactions require the NCUA’s approval, and state-chartered, federally insured credit unions also must obtain approval from their state regulator.

Comments on the proposed rule must be received no later than 60 days following publication in the Federal Register.

Annual Performance Plan Sets 2020 Agency Priority Goals

The Board approved the NCUA’s 2020 Annual Performance Plan, which provides specific direction and guidance to implement the overarching goals listed in the 2018–2022 Strategic Plan.

The performance plan describes how the agency will reach its strategic goals and its monitor progress in 2020. The plan identifies four agency priority goals:

  • Fully and efficiently execute the requirements of the agency’s examination and supervision program;
  • Effectively identify and evaluate risk in complex credit union portfolios;
  • Promulgate efficient, targeted regulation tailored to offer meaningful relief without undermining safety and soundness; and
  • Implement secure, reliable, and innovative technology solutions.

The NCUA developed the 2020 performance plan simultaneously with the 2020–2021 budget. The performance plan, in combination with the 2020–2021 budget, executes the agency’s strategic plan.

Board Extends Loan Interest Rate Ceiling to September 2021

After reviewing recent trends in money-market rates and financial conditions among federal credit unions, the Board extended the current interest rate ceiling of 18 percent on most federal credit union loans through Sept. 10, 2021.

The Federal Credit Union Act caps the interest rate on federal credit union loans at 15 percent; however, the NCUA Board has discretion to raise that limit for 18-month periods if interest-rate levels could threaten the safety and soundness of credit unions. The 18-percent cap applies to all federal credit union lending except originations made under NCUA’s payday alternative loan program, which are capped at 28 percent currently.

An NCUA staff analysis concluded that money market rates have risen over the preceding six-month period and that lowering the rate ceiling below the current 18-percent maximum would threaten the safety and soundness of individual credit unions, due to anticipated adverse effects on liquidity, capital, earnings, and growth. The Federal Credit Union Act requires both those conditions exist for the Board to allow the interest rate ceiling to be higher than 15 percent.

The analysis also found that a reduction in the loan rate cap would likely result in a reduction in payday alternative lending, a reduction in federal credit union earnings and some members turning to payday lenders to meet short-term borrowing needs.

The Board will continue to monitor market rates and credit union financial conditions to determine whether a change should be made to the maximum loan rate. The Board may take action sooner than 18 months, if circumstances warrant.

Final Rule Confirms Required Inflation Adjustments to Civil Monetary Penalties

The Office of General Counsel briefed the Board on the required inflation adjustments for the maximum amounts for civil monetary penalties under its jurisdiction, as required by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015.

The act requires agencies to adjust the maximum amounts of civil monetary penalties annually to account for inflation. The NCUA Board previously approved these adjustments by notation vote on Jan. 7, 2020. The final rule will become effective upon publication in the Federal Register.

The NCUA tweets all open Board meetings live. Follow @TheNCUA on Twitter, and access Board Action Memorandums and NCUA rule changes at The NCUA also live streams, archives and posts videos of open Board meetings online.

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