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Limited services smaller numbers among CUNA recommendations

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WASHINGTON (4/7/09)--A revamped corporate credit union system would be most effective if it offered limited services (leading to reduction in the number of corporates), served a national field of membership, met stronger capital requirements, and included a prescribed number of “outside directors” who could “contribute diverse experiences” to a corporate’s board, the Credit Union National Association (CUNA) has written in a comment letter to the National Credit Union Administration (NCUA). In its letter to NCUA on the agency’s “advance notice of proposed rulemaking” (ANPR) on corporate credit unions, signed by CUNA President/CEO Dan Mica and Terry West, chairman of CUNA’s Corporate Task Force (and president/CEO of Vystar CU, Jacksonville, Fla.), CUNA acknowledged that the NCUA Board must first deal with stabilizing the corporate credit union system, and then make a transition to a revised system. However, when the time to make revisions comes, CUNA suggested several major changes:
* Corporate credit unions should focus on core services of settlement, payment systems and meeting short-term investment and liquidity needs of member credit unions. Corporates’ investment authority should be carefully reviewed and concentrations in long-term, on-balance sheet investments should not be permitted, due to the past inability of corporates to reasonably manage or mitigate risk in these areas. * The two-tier system of U.S. Central and many corporates has outlived its utility. Additionally, characteristics of that system that facilitated undue risk taking, reduced credit unions’ capital and created inefficiencies must be eliminated. The appropriate number of corporates in the future will depend on the primary functions and services that corporates will be allowed to provide. “Processing payments and handling settlements are scale businesses, so the number of corporate credit unions can be sharply reduced to a very small number,” the letter states. “With only a few, large corporate credit unions serving natural person credit unions, there would no longer be the need for a two-tiered system.” * With a small number of corporates operating in the future, each should have a national field of membership, which would foster competition and thus innovation. (However, CUNA wrote, it “understands that competition among corporate credit unions may have in the past contributed to thinly capitalized institutions, operating on very low margins taking significant risks.” CUNA noted, however, that with “sufficient capital requirements and with investments restricted to only those necessary to perform short-term investing and liquidity,” competition among the corporates would better serve credit unions “in a context of full safety and soundness.” * Tier 1 capital requirements should be at least 4% and could be as high as 6% (over a reasonable period of time). Risk-based capital should also be required, and natural person credit unions that use corporates should be required to “maintain contributed capital in their corporate.” The CUNA letter noted that “if NCUA chooses to institute risk-based capital requirements for corporate credit unions, such risk-based capital should be comparable to those applicable to similarly situated Federal Deposit Insurance Corp. (FDIC)-insured depository institutions.” However, if NCUA adopts CUNA’s recommendations for limits on corporate business and investment activities, “risk-based requirements are likely unnecessary.” * Corporates should be permitted to have outside, non-member directors who can “contribute diverse experiences to a corporate credit union’s board,” CUNA wrote. Further, up to 20% of “non-member” board members should be permitted (if the members agree), and these members should earn a “reasonable director’s fee.”
In other points raised in the letter, CUNA called it “imperative” that NCUA take additional steps to assure credit unions that it will not sell securities of U.S. Central and Western Corporate (WesCorp) FCUs “prior to almost complete amortization.” The only caveat CUNA suggested: If NCUA can work with the U.S. Treasury Department to obtain a favorable price well above the current market value for the securities before they mature. CUNA also used the comment letter as an opportunity to review the impact of NCUA’s corporate stabilization program on credit unions, noting the high costs. Along those lines, CUNA stated it will “continue to do all we can to attain a better outcome for credit unions than the current situation, including through assistance from the U.S. Treasury.” CUNA commended the NCUA Board for its announcement late last week to make more information from the PIMCO report available to the credit union system. While CUNA said it "appreciates the latest agency memo to examiners" that credit unions have some flexibility in delaying the reporting of the impairment of the NCUSIF deposit, issues relating to the reporting of the impairment of corporate credit union capital have not been resolved because the estimates of the losses from U.S. Central and WesCorp are still under review. CUNA indicated it wants to work with NCUA to provide clarify to credit unions on the accounting issues. For the full letter, use the resource link.

NCUA memo guides on delaying NCUSIF write-downs

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WASHINGTON (4/7/09)—In a memo Friday to regional directors and examiners, shared with the Credit Union National Association (CUNA), the National Credit Union Administration (NCUA) is providing guidance to field staff on an accounting bulletin (AB 09-02) released earlier in the week addressing corporate credit union issues. The memo is an effort to clear up confusion created by the accounting bulletin on whether credit unions may delay reporting the write-down of their 1% National Credit Union Share Insurance Fund (NCUSIF) deposit. The NCUA memo says credit unions should follow the accounting bulletin and book the impairment as of March 31. It also indicates that credit unions may be able to delay reporting the impairment, if their accountant determines the delay is consistent with GAAP and provides guidance to the credit union to that effect. However, it is CUNA's understanding that even without written guidance from an accountant, examiners are being instructed not to deal harshly with a credit union that delays the write-down. CUNA is working with NCUA to get further clarification on this matter.

Inside Washington (04/06/2009)

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* WASHINGTON (4/7/09)--The Department of Housing and Urban Development (HUD) announced Monday that it will crack down on foreclosure rescue scams and loan modification fraud, and will send lender “swat teams” to reduce fraud and risk among lenders working with the Federal Housing Administration (FHA). During a hearing last week, HUD Secretary Shaun Donovan said he will dispatch teams of investigators to conduct on-site reviews of lenders, especially those whose refinance portfolios indicate distress or unusually high default rates. Donovan also asked Congress for additional funds next year for more FHA staff to handle the surge in loan activity. FHA’s role has grown to overseeing 30% of all lending activity, up from 3% in 2006. HUD, the Treasury, the Department of Justice, the Federal Trade Commission and the Illinois state attorney general also discussed initiatives to coordinate information and resources across agencies to combat fraud ... * WASHINGTON (4/7/09)--Two Senate votes last week indicate that lawmakers do not strongly support the Federal Reserve Board as a top candidate to oversee systemically significant institutions (American Banker April 6). The amendments would require the central bank to disclose more information about its liquidity facility and lending efforts, including recipients of funds through its discount window. The votes signal that Congress will not grant the Fed more power, according to Sen. Jim Bunning (R-Ky.), who co-sponsored one amendment the Senate approved. The Fed is not independent and is acting like an arm of the Treasury Department by helping Treasury to get around asking Congress for money, he said. The votes show that the Senate is going to demand more accountability from the Fed ... * WASHINGTON (4/7/09)--Last week, the Group of 20 met in London and agreed that rules governing executive compensation would be applied to foreign and domestic banks--even if they have not received government taxpayer assistance (American Banker April 6). The group told companies to streamline their pay incentives to achieve long-term stability and told regulators to assess a company’s pay policies when determining its safety and soundness. The practices should promote principles of the Financial Stability Forum--which recommended that boards independently create pay policies and monitor their effectiveness. Bonuses should directly relate to company performance and should shrink if a company does poorly ... * WASHINGTON (4/7/09)--The Federal Deposit Insurance Corp. (FDIC) has released its fourth quarter profiles of state-by-state banking and economic conditions. The profiles are broken down by state and include Puerto Rico and the U.S. Virgin Islands ... * WASHINGTON (4/7/09)--The Credit Union National Association will offer a vendor due diligence audio conference April 14 from 1 p.m. to 2:30 p.m. CDT. The conference will provide information on recent National Credit Union Administration guidance on the evaluation of third-party relationships; effective planning for third-party arrangements; credit union-wide vendor risk assessments; basic contracting tips; and information on how to create solid staff oversight and quality control ...

Federation advocates CDRLF as secondary capital

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ALEXANDRIA, Va. (4/7/09)--The National Federation of Community Development Credit Unions sent a letter Thursday to the National Credit Union Administration (NCUA) to “urge swift action to assist low-income credit unions at a time of unprecedented challenge to their survival.” The federation requests that NCUA amend the regulations of the Community Development Revolving Loan Fund (CDRLF) to permit the issue of secondary capital loans to low-income designated credit unions, which will enable them to:
* Maintain and expand their services in distressed communities; * Increase their regulatory net worth; * Avoid prompt corrective action (PCA); * Minimize the need for mergers and liquidations; and * Provide an added layer of financial insulation for the National Credit Union Share Insurance Fund.
The CDRLF, established by Congress in 1979, makes non member deposits and loans at a rate of 1% for five-year terms. Shifting the CDRLF from providing liquidity deposits and loans to provide secondary capital loans “will provide a source of vitally needed net worth to low-income credit unions, helping to ensure that they can maintain or expand their role in revitalizing their communities,” the federation said. The federation estimated that NCUA’s corporate stabilization plan will cost community development credit unions $55.7 million. About 87.6% of CDCUs will not be profitable this year, and 20% will have a net worth less than 6%. The Credit Union National Association wishes to work with the federation to pursue its request of secondary capital for low-income credit unions from NCUA.

Comment call on CU reporting system

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WASHINGTON (4/7/09)--The Credit Union National Association (CUNA) is seeking comments from credit unions regarding the National Credit Union Administration’s (NCUA) proposed rule to require federal credit unions to submit reports and other information through a new, web-based system expected to be in place this year. Currently, federal credit unions can submit their reports by sending them electronically using NCUA software, e-mailing them, saving them to a CD and then sending to NCUA, or sending them as hard copies. The new process aims to make reporting more efficient and provide a single portal for credit unions to submit, edit and view the data NCUA collects. It is expected to be implemented during the third quarter for natural person credit unions, and next year for corporate credit unions. Comments are due to CUNA May 15. For more information, use the link.