NCUA Proposed Amendments Neither Encourage, Nor Discourage Conversions
I am writing to correct several inaccuracies in Credit Union Journal's coverage of the NCUA Board action July 20 regarding share insurance calculations and assessments.
The article, "NCUA Shuts Escape from Corporate Bailout Charges," describes proposed amendments that address how a credit union that enters National Credit Union Share Insurance Fund coverage, or departs from NCUSIF coverage, in any given year calculates its share of any deposit replenishment assessment, premium assessment, or equity distribution in that year.
Although your coverage says otherwise, the proposal does not break new ground — it simply clarifies in NCUA's regulations how NCUA interprets, and currently applies, the requirements of the Federal Credit Union Act (the Act). There are three important misstatements in the article.
First, the statement "(t)he Board issued for a quick 30-day comment period a proposed rule that would make all federally insured credit unions responsible for replenishing their 1% National Credit Union Share Insurance Fund (NCUSIF) deposit the moment NCUA announced publicly the need to do so," is inaccurate.
The proposed amendments considered by the Board amendments would not immediately make federally-insured credit unions responsible for replenishing their 1% NCUSIF deposit - the Federal Credit Union Act already does that. Credit unions that decide to convert to private insurance, or to a banking charter, cannot escape their obligation to replenish a depleted deposit. If these credit unions converted after the NCUSIF announced a deposit depletion, but before the NCUSIF invoiced the replenishment, the NCUSIF would reduce their deposit refund by the amount of any announced depletion - regardless of whether this proposed rule is ever finalized.
Second, the statement that "[t]he rule will also make all credit unions liable for any premiums assessed by the NCUSIF if they are insured by the NCUSIF in the same calendar year" is also inaccurate. The Act specifically recognizes the possibility of a conversion to private insurance in a year in which the NCUSIF assesses a premium, and the Act requires that the converting credit union pay a pro rata share of any premium assessment in that year based on the number of months it was federally insured in that year. Again, this requirement is not something new that will be created if and when NCUA adopts the proposed amendments.
Third, the purpose of NCUA's proposed rulemaking was not "to stop credit unions from converting to private deposit insurance." The purpose of the rulemaking was to explain in detail how a credit union that transitions in or out of the NCUSIF — by insurance conversion, charter conversion, or liquidation — calculates its share of any replenishment or assessment required by the Act. The rulemaking treats both CUs departing the NCUSIF, and those entering the NCUSIF, neutrally and evenhandedly.
For example, a NCUSIF premium is generally calculated by multiplying a credit union's insured shares as of the last reporting period times the premium percentage (e.g., .0015). If this product is termed the "standard premium amount, "a credit union that converts from federal to private insurance on June 30 of the year in which there is a premium assessment will be liable for only 6/12ths of this standard premium amount because the credit union was federally insured for only six months (January through June) of the year. Conversely, a credit union that converts the other way - from private to federal insurance - on June 30 will also be liable for 6/12ths of the standard premium because it was also federally insured for only six months (July through December).
The proposed rule clarifies certain things, like the fact that if a premium is announced in January and paid in full by a credit union shortly thereafter, and then the credit union converts to private insurance later (e.g., on June 30), the credit union is entitled to a refund of part of its paid-up premium to reflect its pro rata obligation (e.g., a refund of 6/12ths of the original premium).
It is important to note, contrary to the implications in the article, that the proposed rule does nothing to either discourage or encourage conversions to or from private share insurance. NCUA is responsible for administering a strong and appropriately funded NCUSIF and this action by the Board furthers this commitment. To editorialize otherwise is not accurate or helpful to your readers in understanding the content or impact of NCUA rulemaking.
Michael E. Fryzel, Chairman
NCUA, Alexandria, Va.
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