The NCUA Board approved a revised risk-based capital rule at the agency's Jan. 15 board meeting, which reduced the number of credit unions subject to the new capital requirements and lowered the well-capitalized standard by 0.5%.
NCUA Board Member Mark McWatters voted against the proposed rule, arguing that the agency does not have the legal authority to implement a two-tier risk-based net worth system.
Credit unions with up to $100 million in total assets are exempt from the proposal and the well-capitalized standard dropped to 10% from 10.5% in the originally proposed RBC rule.
The new proposal also lowered risk weights for residential real estate loans and member business loans, removed interest rate risk from risk weighting and extended the rule's effective date from 18 months to three years, effective January 2019. The rule would further amend the definition of a current loan to 90 days past due, to provide parity with banking regulations.
Despite limiting risk weight calculations to include just concentration and credit risk and excluding interest rate risk, the NCUA said it intends to consider alternative approaches to manage interest rate risk.
The agency estimated that the total non-recurring costs of the proposal through 2018 would be $3.7 million. About half the costs were expensed to updating the call report and exam systems, and half to training and communications. Lower costs were disclosed for data systems change management and policies, procedures and guidance.
The total estimated one-time cost for non-complex credit unions totaled 101,980 hours or $3,252,142, amounting to an average of $638 per credit union. For complex credit unions, estimated costs totaled 58,200 hours or $1,855,998, averaging $1,276 per credit union.
"These changes would substantially reduce the number of credit unions subject to the rule, reduce the impact on affected credit unions, and afford those credit unions sufficient time to prepare for the rule's implementation," the NCUA board action memorandum said.
NCUA Board Chairman Debbie Matz said she solicited 11 law firms around the nation to review the legality of establishing a two-tier risk-based net worth standard for the credit union industry.
"I ultimately chose the Global Banking and Payment Systems practice of Paul Hastings, based in Washington, D.C. Paul Hastings' partners have years of experience on legal issues related to [prompt corrective action], from the perspectives of financial institutions as well as from the perspective of a federal agency," Matz said.
The law firm's services cost the agency $150,000, which was paid in 2014 from the Office of General Counsel's line item for contracted legal services, according to Matz.
The legal opinion said the Federal Credit Union Act provides the NCUA with the "interpretive flexibility" to implement a two-tier risk-based net worth system. Section 216 of the FCUA is "at best, ambiguous with respect to the statutory authority of the NCUA to implement a two-tier RBNW [risk-based net worth] requirement for complex credit unions, as the language can be interpreted in multiple ways," according to the opinion the NCUA released Jan. 19.
According to the firm's analysis, section 2016 "does not prevent NCUA from imposing higher requirements on 'well-capitalized' credit unions to provide greater protection against risks."
McWatters still questioned the NCUA's legal authority.
"As a practicing attorney, I have served on the legal opinions committee of large cross-border law firms and note that a 'could' opinion represents a relatively modest standard of assurance," McWatters said. "In the obscure, arcane and highly technical and nuanced world of legal opinions, key words such as 'could,' 'would,' 'should,' and 'more likely than not' truly matter."
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