Let’s say you own a car that’s worth $5,000. C’mon, dream a little. Would you hire a financial planner who recommended you keep $12,500 reserved in the event something ever happened to that vehicle? Probably not. But it’s the kind of confusion a number of CUSO and CU executives are experiencing these days.
At issue is a component of NCUA’s risk-based capital proposal related to the risk-weighting of investments in CUSOs. As currently proposed, investments in CUSOs have to be weighted at 250%, while loans to CUSOs must be risk-weighted at 100%. But where there has been confusion is around the actual math involved; 250% doesn’t mean 250%. According to NCUA, the actual amount would be 26.25%, so in the case of that $5,000 used car, it would be $1,312.50.
You’d have to have been busy printing “I Heart Vladimir” t-shirts in Crimea in recent months if you haven’t noticed all the discussion and debate the proposed standards for risk-based capital have created. Many have if not embraced the rules at least acknowledged the reasons behind them, and a multitude of CUs will not be affected (except for the paperwork). But during the NACUSO annual meeting here last week peaceful acceptance did not rule the day, with many openly wondering how the risk-weights will actually work?
“Certain assets are given particular risk rates with the intention of accounting for risk based on the types of assets a credit union holds,” acknowledged Guy Messick, the well-known attorney for CUSOs who is with the Media, Penn.-based Messick & Lauer and who is active in NACUSO. “We think this is sending the wrong message to the industry with regard to CUSOs. CUSO investments are rated at 250%. But mortgage servicing rights are also rated at 250%, and non-delinquent mortgages and delinquent mortgages are rated as being less risky. We do think risk-based capital ratios are inevitable, but we are pushing for changes, specifically a recognition of the benefits that CUSOs provide. The risk-rating doesn’t make sense.”
Not The Happiest Place On Earth
The controversy meant Orlando was not the Happiest Place on Earth for most of the CUSO execs I talked to (although it seems clear we are seeing new investments in CUSOs). But it was also hard to overlook that amidst all the strong opinions being expressed, when one person asked a room of several hundred how many had written a comment letter to NCUA, fewer than five hands were raised.
But that’s not to say the feds aren’t feeling it. NCUA Board Member Rick Metsger shared that FYI there’s been little TLC for RBC, calling it “much maligned,” but also stressing it is “meant in part to make sure credit unions have capital on hand in a changing environment.”
The comment period—the longest NCUA has offered in 15 years—runs through May 28, and while he didn’t say it directly, Metsger intimated the rule will evolve before it’s voted on, saying it is currently “written in sandstone.” The agency’s newest board member admitted it has heard plenty of feedback on the proposed risk-weightings.
“It’s been suggested (the proposal) is unprecedented and unauthorized,” said Metsger. “The reality is the rest of the world is moving toward greater reliance on risk-based capital. The GAO and IG have recommended we modernize our risk-based based capital rules. But comparable does not mean identical. We understand credit unions are going to have to have different rules. It’s been suggested our rule is a one-size fits all, and that could not be further from the truth. It’s the current 7% net worth rule that IS a one-size fits all. Differences in risk should be recognized.”
Metsger reiterated the agency has projected that the majority of CUs will discover they have more capital under the RBC standard than they do under the current standard; that fewer than 200 CUs will have to raise capital in order to become well-capitalized, and they have the option of reducing risk in portfolio rather than raising capital on their own; that 189 CUs under the current proposal would drop from well capitalized to adequately capitalized, and that just 10 run the risk of dropping to under-capitalized.”
Not Feeling The Love
But all that left many CUSOs still not feeling the love. Metsger claimed the agency does appreciate the role CUSOs play. “We want you to know that these risk weightings are lower than the ones regulators put on banks. Loans have a lower risk weighting than equity, because loans have a higher payout in the event of a failure. But we recognize a majority of CUSOs have no real risk to the credit union.”
It’s that last point that kept the CUSO reps talking. Even after Metsger’s remarks one person told me, “I still don’t think NCUA really fully understands everything CUSOs do for credit unions. Just the savings in operating expenses alone ”
Another person suggested there was some irony at work with the risk-based capital proposal, saying the real risk was the proposal is that it will reduce capital by discouraging credit unions from investing in CUSOs, leading to a loss of potential new revenue streams and means for reducing expenses.
CUs and CUSOs will have to wait to see how the final rule plays out. In the meantime, if you’d like to send me some money for a used car you already own, let me know.
