Modernized Occupancy Rule Provides Regulatory Relief

Board Action Bulletin

Possible Stabilization Fund Assessment Rebates, Depleted Capital Recoveries Range from $3.4 Billion to $4.9 Billion

ALEXANDRIA, Va. (Dec. 15, 2016) – The National Credit Union Administration Board held its eleventh open meeting of 2016 at the agency’s headquarters here today and unanimously approved three items:

• A final rule providing regulatory relief to federal credit unions by eliminating the full occupancy requirement in the current occupancy rule.
• An interim final rule amending the agency’s Freedom of Information Act regulation to provide even greater agency transparency and to comply with changes in federal law.
• A request from the Texas Credit Union Department to revise its member business lending rule to provide parity with NCUA’s rule.

The Chief Financial Officer briefed the Board on the performance of the Temporary Corporate Credit Union Stabilization Fund, which remained in a positive net position.

The Director of Examination and Insurance also briefed the Board on the performance of the corporate credit union legacy assets and the NCUA Guaranteed Notes program, updating projections on a possible future Stabilization Fund rebate.

Updated Occupancy Rule Will Provide Flexibility

Federal credit unions will have greater flexibility in acquiring and holding property under a final rule (Parts 701 and 721) approved by the NCUA Board.

“We have a goal of providing regulatory relief, whenever possible, while continuing to ensure safety and soundness,” NCUA Board Chairman Rick Metsger said. “This change resulted from listening to credit union stakeholders’ suggestions. It cuts unnecessary paperwork and gives credit union boards the authority to make their own business decisions in this area.”

Once effective, the final rule will eliminate the requirement in the former occupancy rule that federal credit unions must plan for and eventually reach full occupancy of acquired premises.

Specifically, the final rule modifies the definition of “partially occupy” to mean occupation and use, on a full-time basis, of at least 50 percent of a premises by a federal credit union or by a combination of the federal credit union and a credit union service organization in which the federal credit union has a controlling interest. The modernized rule also keeps the current regulatory timeframes for the partial occupancy of premises.

The final rule, available online here, is identical to the proposed rule and will become effective 30 days after publication in the Federal Register.

Future Stabilization Fund Rebates Possible, but Markets and Law Decide When

Current estimates indicate the improved performance of the corporate resolution program could lead to rebates of some Temporary Corporate Credit Union Stabilization Fund assessments and partial recoveries for holders of depleted corporate capital.

Experts in NCUA’s Office of Examination and Insurance provided the Board with a detailed briefing on the current corporate resolution cost projections. They emphasized the estimates are subject to change, based on asset performance, future recoveries from NCUA’s legal actions against firms that sold the faulty residential mortgage-backed securities to the five failed corporate credit unions and economic variables such as unemployment, housing prices and other factors. The legacy asset cash-flow projections are also similarly subject to revision.

The current estimated range of available funds is between $3.4 billion and $4.9 billion. Federally insured credit unions could see assessment rebates in the range of $2.5 billion to $3.2 billion when the Stabilization Fund close, currently scheduled for 2021. Potential estimated recoveries to holders of depleted capital in the failed corporate credit unions range from $900 million to $1.7 billion. However, these cannot be distributed until all other obligations of the corporate credit unions’ estates are paid.

Changes in the economy or the performance of the legacy assets that secure the NCUA Guaranteed Notes, as well as certain requirements of the Federal Credit Union Act, will dictate the eventual amount of funds, if any, available to provide rebates and the timing of those rebates.

The Federal Credit Union Act directs that assets of the Stabilization Fund may only be distributed when the fund closes, and those assets must be distributed to the National Credit Union Share Insurance Fund. Any rebates would be based on whether that transfer of funds triggers a dividend.

Larry Fazio, Director of Examination and Insurance, said it is important to remember that NCUA’s responsibility as liquidating agent for the five failed corporate credit unions is to conduct an orderly liquidation.

“This means our goal is to obtain a reasonable price upon which to liquidate assets of failed institutions while trying to minimize losses to the Share Insurance Fund and Stabilization Fund,” Fazio said.

Credit unions have paid approximately $4.8 billion in Stabilization Fund assessments. Thanks primarily to larger-than-expected legal recoveries, NCUA projects no further assessments will be needed, assuming the continued positive performance of the economy and the legacy assets.

The corporate resolution briefing is available online here. Since 2011, NCUA has made detailed data about the progress of the corporate resolution available on its website here. This material is updated semi-annually to provide credit union system stakeholders with the best available information. Similar information about the performance of the NCUA Guaranteed Notes program is available here.

Stabilization Fund Remains in a Positive Net Position

For the quarter ending Sept. 30, 2016, the Temporary Corporate Credit Union Stabilization Fund’s net position increased from just over $1 billion to $1.5 billion, continuing its recent trend.

The increase in the Stabilization Fund’s net position resulted primarily from legal recoveries and improvements in projected cash flows related to the legacy assets that secure the NCUA Guaranteed Notes. A reduction in the provision for insurance loss of $472.3 million and guarantee fee income of $7.6 million contributed to the Stabilization Fund’s $478 million net income for the quarter. The estimate of the fund’s performance is based on the best available preliminary and unaudited information.

On Oct. 24, a $1 billion payment to the U.S. Treasury, from available cash collected after Sept. 30, repaid all outstanding Treasury borrowings, leaving a cash balance of $235.5 million as of Oct. 31.

While the Stabilization Fund continues to have a positive net position for 2016, no funds are available to provide federally insured credit unions with an immediate rebate. Future changes in the economy or in the performance of the legacy assets securing the NCUA Guaranteed Notes are likely to change the value of the assets the agency and the Stabilization Fund eventually can access at the end of the program.

Created by Congress in 2009, the Stabilization Fund has reduced the impact of the costs to credit unions of resolving the corporate credit union crisis. The Stabilization Fund is set to expire in 2021. Only when the holders of NCUA Guaranteed Notes are paid and the fund is closed can rebates be made to credit unions. Based on current projections, NCUA expects no future Stabilization Fund assessments to credit unions.

Rule Makes Required FOIA Changes

NCUA’s Board approved an interim final rule (Part 792) that implements new records disclosure procedures under the Freedom of Information Act, as required by recent changes to federal law adopted by Congress in 2016.

The interim final rule implements new procedures for disclosure of frequently requested records and electronic records under FOIA, for assessing fees, and for resolving disputes through the agency’s FOIA Public Liaison and the Office of Government Information Services, which is part of the National Archives and Records Administration.

While the interim final rule, available online here, is issued without prior notice and will become effective upon publication in the Federal Register, the NCUA Board will review and consider public comments, which must be received within 30 days of publication.

Texas Member Business Lending Rule Changes Approved

The NCUA Board approved a request from the Texas Credit Union Department to revise its member business lending rule to provide parity with NCUA’s own rule (Part 723), approved by the Board at its February 2016 open meeting.

Under NCUA’s member business lending rule, states that wish to have their own versions of that rule must receive Board approval.

The Board originally approved the Texas member business lending rule in November 1999 and has approved two previous changes to that rule when the agency has changed its own rule.

The Texas member business lending rule will apply to both federally insured and privately insured credit unions chartered in Texas.

The Texas member business lending rule, which becomes effective Jan. 1, 2017, is available online here.

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