NCUA Board Issues Final Rule Enhancing RegFlex Eligibility and Secondary Capital Requirements
for Low-Income Credit Unions
Enhancements To Regulatory Flexibility And Uninsured Secondary Capital Rules Ensure Safety And Soundness While Improving Services To Members.
Alexandria, VA, January 19, 2006 – The National Credit Union Administration (NCUA) Board today unanimously approved Final Rule changes to Part 742, which reduces the minimum net worth requirement and extends the time frame minimum net worth must be maintained to qualify for RegFlex; and to Section 701.34, which allows low-income designated credit unions to redeem funds in secondary capital accounts within five years of maturity; and to require prior approval of a credit union’s plan for the use and repayment of secondary capital.
Regulatory Flexibility Program (RegFlex) Enhancements
The final rule reduces the minimum net worth requirement to 7 percent from the original 9 percent needed to qualify as “well capitalized” and meet RegFlex requirements. The final rule aligns RegFlex qualifications with the minimum 7 percent net worth requirement Congress set to be “well capitalized” under Prompt Corrective Action.
To ensure the 7 percent net worth requirement is a reliable indicator of sustained superior performance, the final rule extends the minimum time from 1 quarter to 6 quarters to be eligible for RegFlex. With the reduction of net worth to the well-capitalized level of 7 percent in the final regulation, 3,880, or an additional 413 credit unions will be eligible for RegFlex. The final rule makes no changes to the relief part 742 currently provides from a variety of regulatory restrictions including the following:
- Charitable contributions
- Nonmember deposits
- Fixed Assets
- Member Business Loans
- Investment related Activities, and
- Purchase of Eligible Obligations
The rule also eliminates the requirement for NCUA to notify credit unions that automatically qualify for RegFlex while it retains the requirement NCUA notify a credit union that applies for RegFlex designation if it is granted or denied. The rule is effective 30 days after publication in the Federal Register.
“Credit unions with proven track records for excellent management and service to members should not be burdened with excessive regulation,” said NCUA Chairman JoAnn Johnson, who called the 2004 Summit on Credit Union Capital, which resulted in these enhancement proposals. ”Regulations should be effective, rather than excessive. Extending the eligibility will ensure safe and sound regulatory flexibility to more well operated credit unions. Since RegFlex’s enactment in 2002, we have realized positive experience with this program and considering the strong capital levels and conservative nature of credit union risk, this is the right time to enhance RegFlex eligibility. I commend the Board for approving these vital changes today and appreciate those in the credit union community who commented on this issue.”
“I believe that it is good common sense to enact policy which balances regulatory flexibility with safety and soundness,” said Vice Chairman Rodney E. Hood. “These enhancements to RegFlex are a significant step forward in providing earned regulatory flexibility for well-managed and well-capitalized credit unions. The NCUA is charged with safety and soundness responsibilities, not with micro-managing a credit union.”
“RegFlex has allowed well-run credit unions to make important financial and operational business decisions without undue regulatory burden. The changes to the regulation adopted today appropriately allow more credit unions with strong net worth to to benefit from regulatory flexibility while balancing safety and soundness,” said Board Member Gigi Hyland.
Secondary capital enhancements
The Board unanimously approved Final Rules to Section 701.34 which allows low-income designated credit unions to begin redeeming the funds in those accounts when they are within five years of maturity, and requires prior approval of a plan for the use of uninsured secondary capital before a credit union can begin accepting the funds.
The Final Rule intends to prevent dilution of a low income credit union’s net worth ratio under Prompt Corrective Action, and allows low income designated credit unions, with regulatory approval, to redeem uninsured secondary capital in the same 20 percent annual increments that the net worth value of its uninsured secondary capital is discounted, thus correcting the imbalance between the “net worth” and “assets” sides of the net worth ratio. The Final Rule also requires the Regional Director and State Supervisory Authority prior approval of uninsured secondary capital in order to facilitate the good use of uninsured secondary capital from the outset and to enhance oversight. The rule becomes effective 30 days after publication in the Federal Register.
“Ensuring safety and soundness doesn’t necessitate a regulatory environment which may cause a detrimental effect,” said Chairman Johnson. “These Final Rule changes are necessary to give low income credit unions the option to release the portion of a secondary capital account that no longer counts as net worth, thus providing more flexibility to serve their members.”
“Secondary capital can be a valuable commodity for low-income credit unions that are emerging and seeking opportunities to expand service to their membership,” said Vice Chairman Hood. “This rule will allow low-income credit unions to safely and soundly manage their capital requirement and operations.”
"Secondary capital can be an effective tool for low-income designated credit unions,” said Board Member Hyland. “The ability to raise at-risk capital can increase the ability to provide needed financial services to individuals who might not otherwise have access to such services. The Board's revisions to the regulation provide low-income designated credit unions the ability to better manage the receipt and redemption of secondary capital while effectively planning for their future growth and success."
The National Credit Union Administration charters and supervises federal credit unions. NCUA, with the backing of the full faith and credit of the U.S. government, operates and manages the National Credit Union Share Insurance Fund, insuring the accounts of more than 85 million account holders in all federal credit unions and the majority of state-chartered credit unions.
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