NCUA Final Rule Offers More Reg, Less Flex For CUs

ALEXANDRIA, Va.-The NCUA Board, struggling with growing losses to the insurance fund from credit unions, cut back significantly on its eight-year-old deregulatory program known as Regulatory Flexibility, or Reg Flex.

The board eliminated four of 10 Reg Flex exemptions for member business lending, fixed-asset holdings, outside discretionary control of investments and stress testing of investments, acknowledging that these areas have been a focus of growing credit union losses.

NCUA Chairman Debbie Matz said the re-regulatory move represents a proactive effort to get control of credit union losses. "I feel it is important to be aggressive, particularly in this environment, in protecting the share insurance fund," said Matz.

Under the new rules all credit unions, including the 3,100 qualified for Reg Flex, will be required to once again obtain a personal guarantee on all member business loans, must gain regulatory approval to exceed NCUA's limit of 5% fixed assets, will need NCUA approval to assign discretionary control of their investments, and must stress test all investments.

The architect of the Reg Flex plan, former chairman Dennis Dollar, told CU Journal earlier this year that while economic conditions and CU balance sheets have changed since he exited the chairmanship, he didn't believe conditions warrant NCUA's plan to broadly rein in the regulatory flexibility he championed.

"I am convinced that the earnings generated during the Reg Flex era is what is sustaining credit unions during this difficult time," Dollar stated earlier. "If not for Reg Flex, incidental powers and FOM expansion in the early part of this decade, we would be facing twice, if not triple the number of CAMEL 4 and 5 credit unions...Reg Flex is self-enforcing in that when a credit union's CAMEL rating falls below the threshold, they are automatically no longer eligible for Reg Flex, and NCUA already has the right to revoke Reg Flex status from any credit union at any time for any reason."

Dollar, himself a former credit union CEO, said he would have rather seen the agency use its right to take Reg Flex away on a case-by-case basis, rather than eliminating the most useful exemptions industry wide.

Separately, NCUA also: approved an amendment to its Prompt Corrective Action rule that will assign a 0% risk weighting for the newly issued NCUA Guaranteed Notes and introduced a merger registry that allows all CUs to express their interest in acquiring troubled credit unions. The merger registry will be secret and will not be disclosed to the public.