Credit union trade groups are in agreement when it comes to the NCUA's derivatives proposal. Unfortunately, the responses aren't pretty.
"There are so many costly restrictions that credit unions that otherwise should be eligible to invest in derivatives won't be able to do so," said Mary Dunn, CUNA senior vice president and deputy general counsel. "The proposal's goal is laudatory and commendable, but the specifics of it will work to defeat its purpose."
Dunn's July 29 letter endorsed an independent assessment by ALM First, a Dallas-based financial consulting firm, which exposes serious flaws in the NCUA's financial analysis.
ALM First said the inclusion of unnecessary application, audit, legal and staffing fees contribute to annual operating expenses of more than $180,000 per year per credit union The total cost to each participating institution over a seven-year period is nearly $1.3 million. And, the firm's assessment also said that once expenses are subtracted from potential income, the total savings from the program under the NCUA's scenario is a mere $126,200.
ALM First's revised scenario eliminates or reduces many of the fees, bringing operating expense to slightly more than $50,000 per year per credit union. Using the same profit scenario, the expense reductions would generate more than $1 million in savings over the same seven-year period.
High fees assessed separately, rather than incorporated into the annual amount paid by each credit union to the regulator, are troubling from both a philosophical and operational point of view, said Carrie Hunt, general counsel and vice president of regulatory affairs for NAFCU.
In addition, NAFCU said in its July 29 comment letter that swaps and caps, while suitable for the current low interest rate environment, will provide inadequate protection as rates rise. NAFCU also said a credit union's board of directors, not the regulator, should set the institution's investment policy.
"Proposal limits are far too low and may handicap the credit unions that need the protection the most," said Tessema Tefferi, NAFCU's senior regulatory counsel and the letter's author.
The NCUA's failure to acknowledge local authority over state-chartered credit unions was particularly nettlesome for NASCUS. Many credit unions with state charters already are authorized by local regulators to invest in derivatives and that authority should continue, said Mary Martha Fortney, NASCUS president/CEO.
"We chose to focus our comments on the proposal's sweeping preemption of state law," Fortney said. "Several states allow derivatives activity for state credit unions, and there has been no demonstrated elevated risk to the NCUSIF."
Much of the rule would effectively preempt state law authorizing state regulators to supervise the derivatives activities of state-chartered credit unions, Fortney said. Regulating and supervising lending activities and risks for state-chartered credit unions have always been the responsibility of state regulators, she said, something that should not change.
As for the NCUA's pay-to-play approach, Fortney said she finds both philosophical and practical problems with it. Practical considerations, she said, include high fees that discourage credit union participation and no indication how the regulator will handle excess funds once the necessary supervisory build-out is complete.
"Why should credit unions be charged to mitigate risk?" she said. "Where is the line drawn on charging special fees for unique activities?"
NCUA Communication Specialist Ben Hardaway declined to comment on the letters or when the final rule will be approved by the NCUA board.
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