Despite the debate, Renz said adaptation of these suggestions – or any other changes that will help credit unions more effectively compete – may be necessary for credit union survival, especially in the face of the burden some credit unions would face under proposed RBC requirements.

"As an industry, I believe we should push very hard to have supplemental capital and an expanded FOM definition in RBC," Renz said. "If NCUA is going to ask for increased capital requirements – even if it only affects a small number of credit unions – I believe this inclusion is critical."

First on Renz's list is a broadening of FOM and common bond definitions beyond geographical limitations. In an online world, relationships exist in a much broader context, and the ability to serve like-minded individuals no matter where they live will be critical to credit union expansion and growth, he explained.

"The NCUA is empowered to define what constitutes a common bond, and the [NCUA] board has set out some very specific requirements in clear terms to demonstrate what's necessary to fulfill the common bond," Renz said. "I think those requirements could be loosened to enable a credit union to retain its cooperative foundation but still open up its FOM."

According to Section 109 of the Federal Credit Union Act, common bonds fall into three categories: single common bond (associational or occupational); multiple common bond; and community.

The regulations further define associational common bond eligibility as determined by seven criteria: Whether members pay dues; whether members participate in the furtherance of the association's goals; whether members have voting rights; whether the association maintains a membership list; whether the association sponsors other activities; the association's membership eligibility requirements; and the frequency of meetings.

The NCUA has the authority to interpret what those criteria mean and, as such, broaden the scope of those service profiles. Issuing a Letter to Credit Unions explaining the expanded parameters might be effective, Renz said.

"That would be a good first step, but a more comprehensive rule change should also be done to clarify that the broader interpretation is the interpretation," he added.

The NCUA is already moving in the direction of modernizing FOM rules through the establishment of an FOM task force, according to Dennis Dollar, a former NCUA chairman and principal partner with Dollar Associates LLC in Birmingham, Ala. However, tightened federal definitions stymie federal charters while state regulations become increasingly liberal, requiring added attention as part of any modernization effort.

"At present, a large number of states are much more flexible on FOM and have created a competitive disadvantage for the federal charter in those states," Dollar said. "A more flexible approach to FOM at the federal level could help restore a better dual chartering balance in this crucial area."

Steven Bisker, a former NCUA assistant general counsel now in private law practice in Alexandria, Va., suggested that the current Trade, Industry or Profession FOM available to federal credit unions might satisfy the expansion need outlined by Renz.

By serving a trade or industry rather than a geographic community, credit unions with a TIP FOM can provide service far beyond local borders, he said.

Ryan Donovan, CUNA's chief advocacy officer, agreed with the expansion concept, but acknowledged there may be more to the situation than Renz hoped.

"We have encouraged Congress and NCUA to look at ways expand the universe of FOMs," Donovan said. "The agency has some authority here, but we also know that Congress has a role to play as well."

When it comes to generating supplemental capital for credit unions, Renz offered two ideas. One expands a current procedure to include more credit unions, while the other is a very old tenet of law Renz said may have industrywide application provided credit unions are allowed to do it.

The first strategy involves expanding the definition of low-income credit unions, which already are allowed to raise limited amounts of supplemental capital, by establishing a tiered structure or sliding scale based on the number of low-income members served.

The more low-income members a credit union serves, the higher the tier they would occupy and the more supplemental capital they would be allowed to raise, according to Renz' rationale. There also may be additional benefits to communities overall, he added.

"If crafted properly, this program can go a long way toward incentivizing credit unions to serve the underserved," he said.

Brian Turner, owner and chief strategist for consulting firm Meridian Alliance in Plano, Texas, agreed with Renz in concept, but questioned the practicality of the approach.

"I agree that additional supplemental capital could be available, but I don't know whether it would provide enough incentive for credit unions to increase their service to low-income members," Turner said. "The industry does not have a particularly high risk-to-capital profile, and even though earnings for smaller credit unions have been weak over the past few years, they continue to retain stronger capital profiles than their larger counterparts."

Bisker is more critical of the approach Renz outlined: "The Federal Credit Union Act states that low-income federal credit unions have members that are predominately low income. Tiered membership is not consistent with the term 'predominately.'"

However, Dollar saw Renz's proposition as possible, given that there is no firm definition of what constitutes a low-income credit union, other than that the LICU designation comes with certain additional advantages.

Moreover, Dollar said, whatever real or implied definitions exist can be amended by the NCUA to address whatever needs the agency determined important.

"In addition to the current requirement that over 50% of a credit union's members must reside in low-income census tracts for the institution to qualify as a LICU, the criteria could reasonably be expanded to qualify those credit unions where over 50% of their loans, deposits or potential members are in low-income census tracts," Dollar explained. "This would open the supplemental capital option to many more credit unions and still maintain the integrity of the LICU designation."

The ability for more credit unions to increase their supplemental capital eligibility by serving more low-income members, Dollar said, would be good both for the institutions and the people they serve.

"And the law would not have to be changed in order to do so," Dollar added, "only an increased commitment to LICUs, of which Chairman Matz, to her credit, has been very supportive."

CUNA also lauded the NCUA's efforts to reevaluate and perhaps re-energize the LICU discussion, Donovan said.

"We support efforts to ensure that more credit unions are eligible for the low-income status, and improving transparency and certainty regarding LICU status," Donovan said. "This is a matter that we will be pursuing with the agency in the [Growth and Paperwork Regulatory Reduction Act] process, as well as the regulatory review process."

The other supplemental capital methodology Renz outlined involved credit unions establishing a trust, a very old style of law usually limited to estate planning.

Renz suggested that a trust plan, properly executed, could be used to help credit unions raise supplemental capital.

"I would suggest that a credit union go to its community and ask for the power to raise capital as part of a trust and to be used for credit union business," Renz said. "We would explain that this is subordinated debt that acts like an investment."

Under Renz's plan, the credit union would act as a trustee of funds, using a simple accounting adjustment to change the funds to supplemental capital. At the end of the trust period, the money would be paid back with interest.

"This methodology will open up supplemental capital to anyone with very little effort," Renz noted.

"Conventional wisdom is that credit unions do not have authority to be a trustee. I can't find any basis in law for this."

Renz was waiting for a more definitive answer from his credit union's attorney at press time. Meanwhile, the idea generated a strong mix of reactions.

"No," said Bisker simply, once again citing the FCUA.

"Net worth is governed by GAAP. It does not include borrowed funds, only retained earnings."

Dollar said the trust strategy, as well as other accounting approaches may be possible, but any strategic initiative would require changes in the law.

"There are a number of ways that supplemental capital could be structured, ranging from the base share required to be a member to some form of subordinated debt for either members, nonmembers or both," Dollar said. "LICUs are already authorized to count supplemental capital toward their PCA net worth requirement, and all credit unions should be authorized to count supplemental capital toward their RBC requirement."

Whether or not either FOM or supplemental capital should be counted as part of the RBC requirements also brought strong sentiments from several industry experts.

"Risk-based capital requirements should center on how much capital a credit union should retain based on the products and services it provides, its historical performance providing those products and services, and its ability to absorb any reasonable financial or economic losses based on its prevailing profile and loss reserves," Turner said. "I do not believe that special accommodation or consideration related to FOM or supplemental capital should be part of any risk-based capital requirement."

Dollar took a different stance, noting that RBC and supplemental capital go hand in hand and that there currently is no legal prohibition against counting supplemental capital against a credit union's RBC requirements.

"Risk-based capital is good public policy if it is incorporated into a true capital modernization initiative," Dollar said. "Effective capital modernization needs both a risk-based capital component and also a supplemental capital component. Without the other, neither is true capital modernization."

CUNA also sees value in the idea of considering supplemental capital as a component in RBC, Donovan said.

"We appreciate that NCUA is taking a close look at supplemental capital as part of its RBC proposal, and that they are also encouraging Congress to enact supplemental capital legislation for the purposes of prompt corrective action," Donovan said. "The question of how that capital might be structured is one that the legislation leaves largely up to the agency."

NAFCU declined to comment specifically on any of the suggestions from Renz, but noted that the association is actively pursuing regulatory relief in all of the areas mentioned, according to Carrie Hunt, NAFCU's SVP of government affairs and general counsel.

Regarding FOM, Hunt said, "We think NCUA needs to make changes to rules to make it easier for credit unions to add select employee groups and make FOM changes necessary for growth."

In the area of supplemental capital, Hunt said the NCUA needs to make clarifying changes to better enable low-income credit unions to strengthen their balance sheets.

Moreover, NAFCU supports the ability and need for all credit unions to have access to supplemental capital to strengthen their financial positions and better serve members.

"We also believe that RBC is unnecessary and that NCUA should focus on other forms of regulatory relief," Hunt said. "The agency has made steps in that regard and we will continue to push them in that direction."

When it comes to taking action, the NCUA also should do what it can without waiting for Congress to act, according to Chicago attorney and former NCUA Chairman Michael Fryzel.

"The issues of supplemental capital, member business lending and FOM have been under discussion for years with the first two having bills introduced in Congress almost every session," Fryzel said.

"Unfortunately, Congress has not been able to pass those pieces of legislation which would be of immense benefit to credit unions allowing them to grow and better serve members."

All three topics run parallel to the NCUA's current focus on RBC, Fryzel added.

"Although legislation has again been introduced to address those issues, there is no strong indication that passage can be achieved this year, once again denying credit unions the tools they need to be competitive and provide the loans to their members that would further stimulate our economy," Fryzel said.

"Credit unions should not have to wait and hope for Congress to act when their regulator can provide relief now that will allow for a greater number of business loans being made to their members," he added.

The entire discussion of supplemental capital and FOM changes has value in light of the RBC rule, Donovan added.

"Tom Renz raises some important and timely questions," he said.

The entire discussion of supplemental capital and FOM changes has value in light of the RBC rule, Donovan added.

"Tom Renz raises some important and timely questions," he said.