During its July 24 meeting, the NCUA Board announced that the Temporary Corporate Credit Union Stabilization Fund assessment will be 9.5 basis points of insured shares. It also reiterated that there will be no NCUSIF premium for this year. The Board approved through March 10, 2014, a continuation of the 18 percent usury ceiling for federal credit unions and adjusted its 2012 operating budget to achieve a $2 million decrease for the remainder of this year, despite adding two staff positions. The Board issued proposals on access to emergency liquidity and the definition of “troubled condition.” The Board was briefed on an upcoming interagency Truth-in-Lending proposal to address appraisal requirements for higher cost mortgages and on the condition of the National Credit Union Share Insurance Fund, which continues to look good. Details of these actions are below.
Temporary Corporate Credit Union Stabilization Fund Assessment
The NCUA Board’s decision sets the 2012 Temporary Corporate Credit Union Stabilization Fund (Fund) assessment of 9.5 basis points right in the middle of the previously announced range of 8 to 11 basis points.
The primary factor regarding the size of this year’s assessment is the cash flow needs of the Stabilization Fund, rather than any change in expected losses over the life of the Fund. There are $3.5 billion of corporate medium term notes coming due this fall. To meet that cash flow need, the Fund currently has $2.8 billion available of its $6 billion line of credit at Treasury, and about $1 billion in cash. Using both of these sources to cover the medium term notes would use up almost all of the remaining Treasury line, leaving virtually nothing in reserve. With the 9.5 bp assessment, which will bring in about $800 million, total Treasury borrowing at the end of the year will be $5.1 billion, leaving $900 million in reserve.
Future assessments should be based more on spreading out the remaining losses on the legacy assets held by the Fund rather than on cash flow concerns. Based on the agency’s latest range of estimates of projected losses on the legacy assets, the remaining total amount of assessments after this year’s 9.5 bp assessment runs from $1.9 billion to $5.2 billion. Since the legacy assets are primarily private-label, mortgage-backed securities, the actual losses will depend on the future of the economy in general and the housing market in particular. The faster the decline in the unemployment rate (lower probability of default) and the more positive home price appreciation (lower loss in event of default), the lower the future losses, and vice versa.
For a given expected level of remaining losses (assessments), the length of time credit unions will have to pay the necessary assessments depends, of course, on the annual assessment rate, and growth rate of insured shares, which comprise the assessment base. The table below shows hypothetical repayment periods assuming four different annual assessment rates, ranging from 5 bp to 12.5 bp of insured shares, assuming annual savings growth of 5%. For example, if the annual assessment were to be set at 10 bp (about the same as this year’s 9.5 bp), at the low end of the loss estimates there would only be two more assessments (with a 1 bp assessment in the third year). At the high end of the loss range, five 10 bp annual assessments would be required, with about a 4 bp assessment in the sixth year. At the mid-point of the remaining expected losses, which for now should probably be taken as the most likely outcome, three 10 bp assessments followed by 8 bp in the fourth year would cover the losses.
Federal Credit Union Interest Rate Ceiling Determination
The Board approved a continuation of the current 18% interest rate ceiling for federal credit union loans through March 10, 2014. The Federal Credit Union Act (Act) sets a 15% interest rate ceiling for federal credit unions but allows the NCUA Board to set a higher rate of interest for 18-month periods based on prevailing financial conditions. The agency will notify federal credit unions of the interest rate ceiling in an upcoming NCUA letter to them.
If NCUA had not acted, the ceiling would have reverted to 15%, as required by the Act, on September 11, 2012. Under the Act, the NCUA Board is authorized to raise the ceiling to 21%. However, increases over 15% may only occur if money market interest rates have risen in the last six months and disintermediation threatens the credit union system. NCUA staff discussed that a reduction in the ceiling could impact a large number of federal credit unions and their loans, since about 62% of federal credit unions have some loans at rates above 15%. CUNA had urged the agency to continue the 18% ceiling at least for an additional 18 months and we welcomed this action.
Mid-Year Review of NCUA’s 2012 Operating Budget
The Board adjusted the agency’s Operating Budget, resulting in a decrease of less than 1% in the fiscal year 2012 Operating Budget; the budget is now at about $235 million. The decrease, which is the third mid-year budget decrease the agency has approved, is a step in the right direction, but CUNA has urged the agency to do more to reduce its budget.
Today’s adjustment includes the addition of 2 new director positions within the Office of Consumer Protection. The $2 million decrease to the Operating Budget is due to changes to the projected cost of staffing for the remainder of 2012. NCUA staff said that the decrease will be deducted from the amount credit unions would otherwise owe to fund the 2013 agency budget.
Proposed Rule – Access to Emergency Liquidity
The Board approved a proposed rule regarding access to emergency liquidity for a 60-day comment period. Under the proposal, all federally insured credit unions (FICUs) with assets of $10 million or more would have to have a contingency funding plan that describes how the credit union would address liquidity shortfalls in emergency situations. FICUs with assets of $100 million or more would be required to have access to a backup federal liquidity source for emergency situations. Smaller FICUs with less than $10 million in assets would be required to maintain a basic written policy that provides a board-approved framework for managing liquidity. Currently, most FICUs have access to emergency liquidity with the Central Liquidity Facility (CLF) by belonging to a corporate credit union that is part of the agent group headed by U.S. Central Bridge, which is expected to close in October 2012. This proposal follows an earlier Advance Notice of Proposed Rulemaking (ANPR) issued in December 2011.
CUNA’s System Liquidity Task Force, chaired by Terry West, will be reviewing the proposal in detail, as well as considering recommendations regarding the future of the Central Liquidity Facility.
CUNA has serious concerns about any new rule for credit unions, including in the area of liquidity. As we have urged NCUA, rather than seeking to regulate in this area, a better approach would be to focus on the guidance the federal financial agencies have already produced on liquidity issues. Maintaining a focus on the future of the Central Liquidity Facility would be appropriate.
NCUA is interested in feedback from smaller credit unions regarding the costs to implement the proposal. NCUA staff noted that a number of credit unions over $100 million in assets currently do not have transaction accounts and would not be eligible to access the Federal Reserve Discount Window. However, NCUA staff said that based on their discussions with Federal Reserve Board staff, these credit unions may be able to set up a de minimis amount of transaction accounts to access the Discount Window.
NCUA plans to host a webinar on August 15 regarding the status of the CLF and the impact of US Central Bridge’s closing in October.
Proposed Rule – “Troubled Condition” Definition (§ 701.14)
The Board also approved for a 60-day comment period a proposed rule to amend the definition of “troubled condition.” Currently, the CAMEL rating assigned by a state supervisor alone determines if a federally insured state chartered credit union is in “troubled condition.” The proposal would establish a uniform definition of “troubled condition” and allow NCUA to determine whether a state chartered federally insured credit union meets the definition, not just when its state examiner assigns it a 4 or 5 CAMEL rating.
CUNA will be reviewing this proposal carefully, working with our Examination and Supervision Subcommittee, AACUL, NASCUS and others. However, already the proposal raises concerns about the possible impact it would have on expanding NCUA’s authority and on dual chartering.
Upcoming Interagency Proposed Rule – Truth in Lending Act
The Board was briefed on plans regarding an upcoming interagency proposed rule on appraisal requirements for “higher-risk” mortgages under the Truth-in-Lending Act (TILA), as required by the Dodd-Frank Act. These requirements include written appraisals based on a physical inspection and a free copy of the appraisal report to consumers, as well as additional requirements for short-term sales. NCUA staff noted that each federal financial agency is currently working through its approval process and proposed rules are expected in August 2012.
The Dodd-Frank Act provides NCUA and other federal financial agencies such as the Federal Reserve Board and the CFPB with authority to issue certain appraisal rules through joint rulemakings. Section 129H of TILA prohibits a creditor from making a “higher-risk mortgage” to any consumer without first obtaining a written appraisal of the property. The definition of a “higher-risk mortgage” under the Dodd-Frank Act is: a residential mortgage loan, other than a reverse mortgage, that is: not a qualified mortgage; and has an annual percentage rate that exceeds the CFPB “average prime rate” by: 1.5 percentage points in the case of a first mortgage that does not exceed the GSE conforming loan limit; 2.5 percentage points in the case of jumbo loan which exceeds the GSE conforming loan limit; or 3.5 percentage points in the case of a second mortgage.
Quarterly NCUSIF Report
NCUA staff reported that the NCUSIF’s equity ratio was at 1.30% as of June 30, 2012 including the capitalization deposit. The NCUSIF’s reserves stand at approximately $642 million, which includes $161 million in reserves for specific credit unions and $481 million in non-specific reserves. There have been 12 credit union failures so far in 2012. The insurance loss expense increased slightly and now stands at $36.2 million year-to-date.
NCUA reported there are currently 399 CAMEL 4 and 5 credit unions, which represent 3.2% of insured shares, or approximately $26.8 billion. NCUA staff also noted that there are 1,679 CAMEL 3 credit unions, which represent 14.66% of insured shares, or $123 billion. Combined, insured shares in CAMEL 3, 4, and 5 credit unions represent approximately 18% of total insured shares.