ALEXANDRIA, Va.–The NCUA board has voted 3-0 to approve an interim final rule that extends temporary adjustments to its prompt correction action (PCA) rules.
The extension runs through March 31, 2023. Several of the board members observed this should be the last time the PCA adjustments are extended.
Specifically, the interim final rule renews two changes to the NCUA’s prompt corrective action rules. The first change temporarily reduces the earnings retention requirement for federally insured, consumer credit unions classified as adequately capitalized.
As NCUA Chairman Todd Harper noted, while the rule is in effect, those credit unions unable to meet the earnings retention requirement will not have to submit a written application requesting approval to decrease their set-asides for earnings.
The second change temporarily permits an under capitalized credit union to submit a streamlined net worth restoration plan if it becomes under capitalized primarily because of continued share growth. The agency said that if a consumer credit union becomes less than adequately capitalized for reasons other than share growth, it must still submit a net worth restoration plan under the current requirements in NCUA regulations
“For nearly two years, the pandemic has greatly affected the credit union system and our nation’s economy. We, however, likely have not yet seen the full impact of the pandemic on consumer credit union balance sheets and performance,” said Harper. “As such, the renewal of these targeted measures for another year is a prudent course of action at this time.”
Harper noted that with inflation, interest rate risk, and labor market and supply chain disruptions likely to continue well into 2022 and beyond, consumer credit unions have much to manage.
Better Able to Focus
“By continuing these short-term assistance measures, eligible credit unions will be able to focus their limited resources on serving their members’ needs — especially those of modest means and communities of color — instead of planning for earnings transfers and developing detailed net worth restoration plans,” said Harper.
Thank you for those insights. My next question is for Kathryn. Over the course of the pandemic, how has the number of well-capitalized and adequately capitalized credit unions changed over the last two years?
Hauptman: ‘Should be the Last Time’
NCUA Vice Chairman Kyle Hauptman noted that two years ago few would have predicted where the credit union community would be going into year three of the pandemic.
“That said, I’d like to make clear that this should be the last time we renew this policy,” continued Hauptman. “Barring something very unexpected, this policy should expire in March 2023. Temporary policies that keep getting renewed aren’t temporary. I’m reminded of the rent control policies that still exist in New York City, first enacted as an emergency measure in World War II.
“The two temporary changes to prompt corrective action (PCA) regulations mirror what was done in 2020 and 2021,” he added. “One amends the regulations to waive the earnings retention requirement for any federally insured credit union that is classified as adequately capitalized. The second modifies the documentation required for net worth restoration plans. The changes address pandemic related factors affecting both the Share Insurance Fund and the net worth of many credit unions.”
Hauptman noted share growth remains unusually high compared to pre-pandemic levels, and that the impact to net worth is not due to risky lending or investments.
Not ‘Business as Usual’
“Streamlining the net worth restoration plan process benefits both affected credit unions and the NCUA by reducing paperwork,” said Hauptman. “It does not mean the plans aren’t reviewed closely. The regional directors have the authority and discretion to work with credit unions if needed. Unfortunately, it is still not ‘business as usual,’ and I urge credit unions to work with the regions if they feel the need. In general, I support keeping these kinds of decisions in the regions – where staff are closer to the day-to-day challenges faced by credit unions.”
In response to a question from Hauptman, NCUA Director of Examination and Insurance Kelly Lay said the most recent data show approximately 150 CUs were able to use the relief as the result of the inflow of deposits affecting their net worth ratios.
Hood: Time to Make ‘Permanent’
Board Member Rodney Hood said he also strongly supports the extensions.
“Because of recent government stimulus, in addition to other factors surrounding the pandemic, I support extending this provision in the event that credit unions temporarily fall below the well-capitalized level and become subject to various prompt corrective action requirements,” said NCUA Board Member Rodney Hood. “This rule provides relief to those that experienced a decline in their net worth ratio due to current events. The interim final rule before us today allows the agency to address problems in credit unions that pose elevated risk to the National Credit Union Share Insurance Fund.”
But Hood also added, “Since this is our third time to issue this relief, I have to wonder, rhetorically, if the board should look at making any of these provisions permanent.”