More public unit and nonmember shares would be OK for credit unions under NCUA proposed rule

Comments sought on removal of $3 million alternative cap

The basis for measuring the regulatory limit on nonmember and public unit shares that federally insured credit unions (FICUs) may hold would change – in many cases increasing the dollar amount that could be held – under a proposed rule issued Thursday during an open meeting of the three-member board of the National Credit Union Administration (NCUA).

The agency estimates an increase of 6%, or about $135 billion, in system funding capacity under the proposal.

Thursday’s proposed rule, out for a 60-day comment period, would revise current rules as follows:

  • The limit on public unit and nonmember shares would be revised to 50% of paid-in and unimpaired capital and surplus less public unit and nonmember deposits.
  • The alternative cap of $3 million would be removed.
  • The ability to seek a waiver to receive more such funds would be removed.
  • A credit union would be required to submit a plan to its NCUA regional director for the use of such funds if public unit and nonmember shares plus borrowings would be greater than 70% of paid-in and unimpaired capital and surplus. (The current requirement is to submit a plan if pubic unit and nonmember shares would exceed 20% of paid-in and unimpaired capital and surplus.)

Currently, NCUA rules permit a credit union to take in total public unit and nonmember shares – often referred to as “nonmember deposits” – totaling up to 20% of shares or $3 million, whichever is greater. A waiver is required to exceed the regulatory limit. Also, only credit unions designated as low-income by the agency are permitted to accept nonmember shares, a provision that would not change under the proposed rule.

NCUA says that, just based on the math involved under the proposed rule, credit unions would have to have a net worth ratio of at least 17% to use the full proposed authority. Staff noted also that smaller credit unions tend to have higher net worth than larger ones so, in effect, would be the primary beneficiaries of the proposed rule.

In keeping with recommendations of NCUA’s Regulatory Reform Task Force, the proposal would align the limit on public unit and nonmember shares with the Federal Credit Union Act limit on borrowings. The act allows a federal credit union to borrow from any source up to 50% of its paid-in and unimpaired capital and surplus, subject to any rules or regulations set by NCUA. The task force determined that pubic unit and nonmember shares are the functional equivalent of borrowings; in fact, the staff and board noted during Thursday’s open meeting that such shares can be a more stable source of funding.

While the board considers the proposed regulatory limit on public unit and nonmembers shares to be high enough that the alternative cap of $3 million will be unnecessary, it says it’s also aware that some small FCUs – particularly low-income ones that rely on large volumes of nonmember shares, or newly chartered credit unions – could be adversely affected. It is seeking comments specifically on this point and whether alternatives should be considered.

“[T]he Board seeks specific comments on whether it should retain the $3 million dollar limit or provide a special exemption for small low-income credit unions that demonstrate a need for large volumes of nonmember shares above the 50 percent paid-in and unimpaired capital and surplus limit and for newly chartered credit unions,” the notice of proposed rulemaking states. “The Board is actively considering these alternatives and may adopt one of these approaches based on the persuasiveness of the comments.”

Notice of proposed rulemaking (Draft notice for Federal Register)

Thursday’s slide presentation