Letter reminds credit unions that secondary capital issuances after Jan. 1 subject to new subordinated rule

Any issuances of secondary capital not completed by Jan. 1 will be subject to the requirements of the new subordinated debt rule, which becomes effective on that date, according to a letter sent Friday by the federal credit union regulator.

There is one potential exception, the National Credit Union Administration (NCUA) said in its letter to credit unions (LTCU) 21-CU-13: low-income designated credit unions are allowed to issue secondary capital approved in 2021, irrespective of the date of issuance, under a proposed rule issued by the agency in September. A final version of the rule, the letter stated, will be considered by the NCUA Board by Jan. 1.

The subordinated debt rule was approved by the NCUA Board nearly a year ago (in December 2020), with an effective date of the beginning next year. That rule allows well-capitalized, federally insured credit unions to count subordinated debt as capital for risk-based net worth purposes.

The proposal issued in September would amend that rule, slightly, by accommodating low-income credit union (LICU) access to federal investment programs, most notably the Treasury Department’s Emergency Capital Investment Program (ECIP). That program directs Treasury to make investments in “eligible institutions” to financially support small businesses and consumers in low-income and underserved communities. Those institutions include federally insured credit unions that are minority depository institutions (MDIs) or community development financial institutions (CDFIs) that are in sound financial condition. The investments are made in the form of subordinated debt.

The proposal would permit funding of secondary capital approved under the current rule, beyond 2021, without the need to reapply under the subordinated debt rule – thus giving those credit unions a measure of regulatory relief.

“Given the current 45-day review period for secondary capital plans, any low-income credit union still planning to submit a secondary capital plan should do so as soon as possible,” the NCUA letter states. “Further, if a low-income designated credit union plans to submit a secondary capital plan this year, it should consider using the application requirements in section 702.408 of the final subordinated debt rule when drafting its plan and submitting an application.

“This can help avoid having to resubmit documentation as long as the application meets the requirements of the final rule,” NCUA wrote.

Subordinated Debt Final Rule Effective January 1, 2022