CUs dodge new assessments despite higher liquidation costs

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In a widely anticipated move, the National Credit Union Administration’s governing board approved a two-year budget at its monthly meeting Thursday.

The plan, which was previewed at a hearing last month at the agency’s headquarters in Alexandria, Va., authorizes NCUA to spend approximately $335 million in the current 2019 fiscal year and $344 million in fiscal 2020, which starts Oct. 1.

Noting the Oct. 17 hearing, as well as the 100-page justification document made public Thursday in advance of the board’s vote, Chairman J. Mark McWatters said NCUA had more than met its goal of making its budget process as transparent as possible.

“The budget … is 100 pages long, not counting the other documents that were already online," McWatters said. "For anyone who really wants to look into NCUA’s budget, there’s a plethora of documents out there. I would suggest you get after it.”

The budget set the overhead transfer rate for fiscal 2019 at 60.5%, meaning nearly two-thirds of NCUA’s annual spending will be funded by the National Credit Union Share Insurance Fund, to which both federal- and state-chartered credit unions contribute. Fees paid by federal credit unions comprise the remaining 39.5% of NCUA’s financing.

In previous years, state credit unions complained NCUA relied too heavily on the share insurance fund, thus subsidizing federal credit unions and inflating the share-insurance assessments paid by state-chartered institutions. However, a recently completed overhaul of the methodology the agency uses to calculate the overhead transfer rate appears to have allayed most of those concerns.

“We are pleased that the ‘principles-based approach’ to calculating OTR that NCUA now employs is continuing to benefit federally insured credit unions — both federal and state charters,” Lucy Ito, President and CEO of the National Association of State Credit Union Supervisors, said Thursday in a press release. “The methodology is fostering clarity and fairness for federally insured credit unions.”

NCUA uses the fees paid by federal credit unions to pay the cost of regulating them. Cash generated by the overhead transfer fee covers insurance-related expenses for both federal credit unions and federally insured, state-chartered credit unions.

NCUSIF update

The board also received a briefing on the status of the share insurance fund, which totaled $15.8 billion on Sept. 30, down about $870 million from the June 30 level. Rendell L. Jones, NCUA’s chief financial officer, attributed the drop off to a surge in liquidation costs, which totaled $745 million in the third quarter, up from $24.4 million for the same period in 2017. Among the CUs liquidated during Q3 was Melrose Credit Union, which was had suffered losses due in part to problems with taxi medallion loans.

McWatters noted NCUA was able to absorb that expense without resorting to a special assessment, due in large part to its move in Oct. 2017 to close out its temporary corporate credit union stabilization fund and merge the approximately $1.9 billion it contained into the share insurance fund.

Earlier this year, NCUA paid federally insured credit unions a dividend totaling $736 million out of the proceeds of the temporary corporate credit union stabilization fund. Opponents of the merger of the two funds argued credit unions should receive a bigger dividend, but McWatters and board member Rick Metsger decided the balance was needed to boost reserves.

“There have been only six failures [in 2018], but the cost has been astronomical,” McWatters said Thursday. “It illustrates the point that larger credit unions, when they fail, have a tremendous impact. … We’re fortunate we were able to use the stabilization fund, but that [option] doesn’t exist in the future.”

In other actions, the board gave preliminary approval to changes to its fidelity bond requirements that, among other things, would require a credit union board to step up oversight of its fidelity bond coverage. They also permit institutions to extend bond coverage to some of their credit union service organizations.

Interested parties have 60 days to comment on the proposed rule change, after which the board will vote on a final rule.

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Law and regulation Compliance Failures Budgets J. Mark McWatters Rick Metsger NCUA Virginia