Leagues make case for NCUA to reissue revised Risk Based Capital rule

The following letter was submitted to NCUA this week from the Massachusetts, New Hampshire, Rhode Island Credit Union Leagues:

September 8, 2014

I am writing on behalf of the Massachusetts, New Hampshire and Rhode Island Credit Union Leagues.

On January 23, 2014, NCUA issued its proposed Risk Based Capital rule to the credit union system. Our Leagues strongly support an effective Risk Based Capital system and commend the agency for its effort to better assess risk in the system in order to protect consumers. The credit union system has grown to more than $1 trillion in assets, serving approximately 100 million credit union members, in large part due to the high-quality, competitive, and safe financial products that credit unions provide consumers. The credit union system and the consumers it serves benefit from an effective and efficient regulatory framework that appropriately measures risk.

The agency received an unprecedented 2,056 comment letters from stakeholders on its Risk Based Capital proposal. Credit unions of all types, charters, and size took the time to comment on the proposal given the potential impact it would have on the future of the system and ultimately consumers. The proposal also generated more than 360 communications from Congress, representing an historic level of outreach by lawmakers to NCUA. In total, nearly 2,500 stakeholders engaged NCUA on this proposal.

On behalf of our membership, I urge NCUA to issue a supplemental proposed rule with an additional comment period. The agency has acknowledged that the revised regulation, which will be the final regulation, will differ greatly from the original proposal in at least three key areas: Risk Weightings, Examiner Authority to Raise a CU’s Capital Requirement, and the Implementation Period. The revision of Risk Weightings in particular will significantly alter the impact of the rule. Given that the final regulation will differ considerably from the original proposal, the credit union system should be afforded another opportunity to review this critically important regulation before a final regulation is issued. The record of comments on the original proposal now contains substantial policy arguments from within and outside the industry, highlighting the need for a supplemental proposal and comment period. In addition, the Risk Based Capital proposed rule is distinguished from other proposed NCUA rules in that it will trigger companion changes to capital levels and will require immediate revisions to call reports and Prompt Corrective Action classifications.

NCUA has shown great care during and after the comment period to allow credit unions the opportunity to interact with the agency. Not only has the agency hosted three listening sessions in different areas of the country, it has also engaged with credit unions, trade associations, other regulators, and Congress in a variety of forums. The agency’s unprecedented level of engagement with the credit union system is appropriate given the impact of a new Risk Based Capital structure. Issuing a supplemental rule for comment would continue the agency’s engagement on this critical issue for credit unions and their 100 million credit union members.

We believe that issuing a supplemental rule with an additional comment period is prudent for the future of the credit union system and consistent with NCUA’s approach throughout this process. Moreover, such action is consistent with past practices whenever the agency determined that such action was in the public interest.  Specifically, the agency reopened a comment period in 2002 on a proposed rule relative to federal credit union investments to fund employee benefit plans. 67 Fed.Reg. 71113 (Nov. 29, 2002).  NCUA’s own precedent was based upon the request of only two comments. The thousands of Risk Based Capital comment letters, many of which contain the request for some type of additional comment period, far exceed this threshold and weigh in favor of “in the public interest” to do so. In order for any type of additional comment period to be effective, stakeholders should have the opportunity to review a supplemental proposal that includes the many revisions that the agency is on record saying will occur. The agency has noted that Risk Weightings may change in the areas of Investments, CUSOs, Corporates, Mortgages and Member Business Loans. These are complicated and critical areas of the proposal that require another review by stakeholders.

Published guidance on federal agency rulemaking also supports additional comment periods wherever appropriate. “An agency may extend or reopen a comment period when it is not satisfied that it has enough high quality comments or when the public comments make a good case for adding more time. Similarly, an agency may find that people have raised new issues in their comments that were not discussed in the initial proposed rule.” Guide to the Rulemaking Process, Office of the Federal Register, 2011.

The more than 2,000 comments from 2,500 stakeholders have given rise to “new issues” that were not in the initial proposed rule and thus compel NCUA to offer stakeholders another opportunity to comment on a supplemental proposal.

For example, current prompt corrective action rules permit a credit union to apply for and receive a risk mitigation credit designed to reduce a credit union’s risk-based net worth requirement when it can document it has properly mitigated credit risk and/or interest rate risk. The proposal did not continue this approach.

Finally, given the credit union system’s very strong health indicators, including 10.77% system-wide capital, 81 basis points Return on Assets, and a .85 delinquency ratio, there is no system duress that would require a rapid adoption of a final Risk Based Capital structure.

It is clear that NCUA is not required to issue a supplemental rule for additional comment. There is no regulatory requirement to do so. However, given the agency’s acknowledgement that the final regulation will have substantial changes that will significantly change the proposed Risk Based Capital structure, we believe the issuance of a supplemental rule with an additional comment period is the appropriate action and in the best interest of all stakeholders.

I urge the agency to recognize the many factors that align for this proposal to be re-issued with an additional comment period.

On behalf of our membership, I appreciate your consideration of this matter.

Paul Gentile
President/CEO