State, Fed Regulators Pushing For Expanded Reg Relief Bill

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State credit union regulators called on Congress to include in its impending regulatory relief package a measure that would allow federally insured credit unions to offer secondary capital instruments, and to count those instruments as net worth under minimum capital guidelines, known as PCA, for prompt corrective action.

The endorsement of the secondary capital allowance is in contrast to NCUA, the monitor of PCA, which has been steadfast in its resistance to calls by the credit union movement to include alternative capital offerings in the calculations established as part of HR 1151, the CU Membership Access Act.

NCUA Chairman Dollar, in explaining the agency's reticence last week, said he believes it is up to credit unions themselves, through their trade associations, and Congress, to decide whether to allow for secondary capital, long a controversial issue within the credit union movement. The NCUA chairman said he hears from credit union representatives on a regular basis from both sides of the issue-those who want allowances for secondary capital, and those who see it as an eroding of the traditional ownership structure for credit unions by creating a new layer of owners.

Secondary Capital Issue

But the state regulators, many of whom have moved ahead of NCUA on the matter by allowing state charters to offer secondary capital instruments, have called on Congress to allow federally insured, state-chartered credit unions to also count those instruments as net worth, something currently prohibited by the Federal CU Act. In a letter to House Financial Service Chairman Rep. Michael Oxley (R-OH), who is drafting regulatory relief legislation, NASCUS-the National Association of State CU Supervisors-asked that a secondary capital provision be included in the bill.

Such a provision was proposed briefly on two separate occasions during last year's deliberations on a regulatory relief package but were not included in the bill ultimately passed by the committee.

The issue of secondary capital emerged after the heated legislative 1998 battle over HR 1151, because the minimum capital standards inserted in the bill at the behest of the bankers restricted minimum capital, or net worth, to retained earnings.

The massive inflow of new savings flooding credit unions over the past two years has diluted net capital and driven this issue to the forefront, as some credit unions that intentionally maintain lower capital ratios see a new need to raise additional capital. In the past two years almost $110-million of new shares has flowed into credit unions, expanding savings by almost 30%. This has reduced net capital ratios from 11.4% to around 10.8% during that time, and for many credit unions to near the 7% statutory minimum.

The secondary capital issue is just one of several HR 1151 provisions being targeted for rollback by NASCUS and other credit union interests as part of the regulatory relief process.

"We need to clean up the mess that was created in HR 1151," said Jonathan Lindley, lobbyist for NASCUS.

NASCUS also asked that Congress loosen the restrictions on member business loans included in HR 1151 by increasing the size of the loans that must be defined as an MBL from the current $50,000 to something like the $307,000 conforming loan limit shared by Fannie Mae and Freddie Mac; and by raising the limits on total MBLs from the HR 1151-imposed 12.25% of assets to something like the 20% limit s&ls are asking from Congress.

The sate regulators also endorsed the proposal to allow privately insured state charters to join the Federal Home Loan Bank System.

NASCUS also told Oxley that after issuance of the impending Government Accounting Office study on credit unions it may ask Congress for reforms that would separate NCUA regulatory functions of the agency's oversight of the NCUSIF, something it has been lobbying for for several years.

NCUA sent Oxley the same list of priorities submitted last year. They asked that Congress amend the Federal CU Act to give NCUA the power, rather than Congress, to set limits for permissible investments for federal credit unions; extend maturities on loans; investments in CUSOs; and the definition of the term "reasonable proximity" for the sake of expanding FOM. These issues, said Dollar last week, "are more appropriate to be addressed by the regulator, rather than by Congress."

Other Requests Made

NCUA also repeated its request that federal credit unions be allowed to deliver certain services, such as wire transfers and check cashing, to non-members within their FOMs, as a means of reaching out to low- and moderate- income people.

The federal regulator also said it has no objections to allowing privately insured state- chartered CUs to join the FHLB System but does not ant to be the arbiter of the issue.

The Financial Services Committee is expected to hold hearings on a bill as early as March.

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