TACOMA, Wash.–A firm that has done extensive work with CDFIs and low-income credit unions is calling on NCUA to make some changes in its proposed regulation on subordinated debt.
CU Strategic Planning, a consultancy that works with CDFIs as well as low-income designated CUs to develop comprehensive business plans, projections and compliance reports and which has helped CUs receive more than a quarter-billion dollars in various Treasury grants, noted NCUA is now proposing to amend the definition of “grandfathered secondary capital” in a way that would encompass secondary capital issued to the United States Government or affiliated entities under applications approved before Jan. 1, 2022, irrespective of the date of issuance.
“First and foremost, CU Strategic Planning is supportive of the guidance announced by the NCUA in its October 20, 2021 Letter to Credit Unions that authorizes the acceptance of subordinated debt investments by eligible low-income credit unions from Treasury’s Emergency Capital Investment Program,” the company said in a comment letter filed with the agency. “This change from earlier proposed policy makes sense on two levels: 1) it recognizes the essential need for flexibility in planning for the capital needs of a subset of credit unions that need access to a greater variety of balance sheet tools, and 2) it aligns the timeframe (30 years) with what is being proposed by Treasury under its ECIP standards. There was no obvious reason for this inconsistency…”
CU Strategic Planning is also recommending several additional changes to the proposed regulation, including:
Allow Membership Capital Deposits to be Counted as Equity
“When a credit union is formed, initial capital contributions (membership capital) represent an important initial stake, allowing the institution to begin doing business,” the letter states. “Credit unions carry this capital on their books, but as non-stock entities, they are constrained in how they can deploy this capital. The NCUA should allow credit unions to count this type of capital as equity, similar to practices of other member-owned cooperatives. This is not only logical, as the capital’s ownership function would be preserved, but would also enable credit unions to more prudently and proactively use this additional capital to enhance member service offerings.”
Classify Non-Member Deposits as Equity and Not Deposits (Liabilities)
“Low-income designated credit unions can accept non-member deposits and secondary capital. Secondary capital enhances the credit union’s net worth and the non-member deposits do not. In most cases, non-member deposits are provided to the credit union to help support the lending activity needs of the low income communities,” the letter reads. “Typically, deposit from the low income members are not enough to support the credit union’s lending demands. Non-member deposits come from “community social investors”, non-profits and foundations that are aligned with the mission of the credit union and want to invest in their communities. Although needed, non-member deposits can decrease the net worth of a credit union. These investments should not be counted as deposits, but instead as equity and accounted for as an investment in the credit union’s mission.”
Give All Federally Insured Credit Unions Access to the Benefits of Secondary Capital
“Finally, we strongly recommend that the NCUA continue its efforts to amend the Federal Credit Union Act to approve secondary capital for all federally insured credit unions, not just low-income designated ones,” CU Strategic Planning wrote. “The benefit of increasing/strengthening the capital position of depository institutions is self-evident, and in the case of cooperative, member-owned not-for- profit credit unions, this would be a logical step that, if undertaken would make credit union balance sheets more durable and flexible, enhance taxpayer protections by supplementing the cushion between a credit union and potential losses to the National Credit Union Share Insurance Fund, and augment the ability of credit unions to serve the consumer finance marketplace. In short, a win-win-win. We are aware that this requires Congressional action, and we stand ready to assist you in this endeavor.”
The letter was authored and signed by President/CEO Stacy Augustine.