Letter details new rules for credit union earnings retention, ‘streamlined’ net worth plans

Earnings retention required for credit unions classified as adequately capitalized, and credit unions’ streamlined net worth restoration plans (NWRPs), are addressed in a letter to credit unions issued by their federal regulator Tuesday.

In May, the National Credit Union Administration (NCUA) adopted new, temporary regulations that relieve credit unions of an earnings transfer requirement when they drop from “well capitalized” to “adequately capitalized” status and that ease net worth restoration plan (NWRP) documentation for “undercapitalized” credit unions. The rules, which took effect May 28 (and stay in effect until year’s end), were issued by the board in response to the coronavirus crisis.

“The NCUA understands the COVID-19 pandemic is affecting credit unions and their members in unprecedented ways,” the letter states. “Where possible, the NCUA Board is providing regulatory relief to reduce the burden on credit unions and facilitate the flow of credit and liquidity within the system.”

Regarding the earnings transfer relief, NCUA’s letter (LTCU 20-CU-18) states that an adequately capitalized credit union unable to meet the earnings retention requirement will not have to submit a written application requesting approval to decrease its earnings retention amount.

“If, however, a credit union poses an undue risk to the Share Insurance Fund or exhibits material safety and soundness concerns, the Regional Director may require the credit union to submit an application for a decrease in the earnings retention requirement” in accordance with agency rules, the letter states. It adds that credit unions required to submit a waiver request to the NCUA regional director will be notified by the agency at least 45 calendar days before the end of the quarter.

In effect until Dec. 31, the rule covers any decrease in earnings retention applications that an adequately capitalized credit union would otherwise have been required to submit prior to the ends of quarters in June, September, and December. A federally insured credit union classified as adequately capitalized based on Dec. 31, 2020, call report data and that is unable to retain 0.1% of its assets in the first quarter of 2021 must submit a written application as outlined under agency rules, the letter states.

Under the NWRP section, the letter states that for credit unions that see their net worth ratios decline, predominantly due to share growth, the agency will temporarily permit a streamlined NWRP to be submitted. “The streamlined NWRP must attest that the reduction in the credit union’s net worth ratio was predominantly caused by share growth and that such share growth is a temporary condition due to COVID-19,” the letter states. “Credit unions that become classified as undercapitalized based on June or September 2020 Call Report data may submit a streamlined NWRP under this authority if share growth is the predominant factor for the decline in the net worth ratio and the share growth is temporary.”

The agency said its regional directors will analyze whether share growth was the top factor in a credit union’s net worth ratio when analyzing streamlined plans. “More specifically, the NCUA will verify that the decline in the net worth ratio was driven by an increase in total assets, and that the increase in total assets is attributed to an increase in shares, not borrowings or other sources of funds,” the NCUA said.

The letter also outlines that:

  • Credit unions expecting a continued decline in their net worth ratio to a level below 4% should notify their NCUA examiner and submit an NWRP;
  • A credit union that becomes less than adequately capitalized for reasons other than share growth, or falls below undercapitalized, must submit a NWRP (although the agency will consider the impact of the pandemic when evaluating the NWRP);
  • The NCUA will evaluate compliance with outstanding NWRPs, including those approved under the temporary provision in the rule, on a case-by-case basis. Less-than-adequately capitalized credit unions that continue experiencing capital deficiencies, NCUA said, whether a result of share growth or other factors, may be required by the regional director to submit a revised NWRP that meets the criteria outlined.

NCUA Letter to Credit Unions (20-CU-18) Prompt Corrective Action Regulatory Relief Measures in Response to the COVID-19 Pandemic