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‘Costly and onerous’: Weighing in on NCUA’s bank purchase rule

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Banks and credit unions are calling for changes to a proposed regulation from the National Credit Union Administration that would streamline guidance for instances of credit unions purchasing banks.

The agency surprised many observers in January when it issued the rule by not proposing any new guidance but merely streamlining existing regulations. Last year was a record year for CU-bank deals, but the pace has slowed dramatically this year, with state regulators blocking some transactions and only a few new deals being announced since the coronavirus outbreak began.

“Although the proposal does not explicitly change current practices for federally insured credit unions (FICUs) entering into combination transactions, the proposal could increase burdens on credit unions and our board of directors and have an impact on field of membership considerations related to these transactions,” wrote Crystal Long, president and CEO of El Paso, Texas-based GECU.

NCUA received about 50 letters on the proposal with roughly 20 of those publicly available as of Wednesday. The comment period ended on Monday, though it’s likely that the board won’t take up the matter again until at least its September meeting.

Long and several others pointed to the fact that NCUA’s proposal has no specific timeline attached to it within which the agency would be required to complete its review. Individual credit unions and state leagues suggested ranges of anywhere from 60 days to six months for approval, including building in time for the agency to provide feedback after the initial application, a credit union response and then NCUA’s final approval.

If the regulator takes too long to approve a deal, suggested Jared Ross, president of the League of Southeastern Credit Unions, “the loan quality of the acquired institution may deteriorate if that institution continues to carry on its operations as before, which may have been the reason for the acquisition in the first place.”

VyStar Credit Union, which bought Citizens State Bank in early 2019, noted that in its experience, obtaining regulatory approval is the element of the process that carries the most uncertainty.

Last month Suncoast Credit Union called off its planned purchase of Apollo Bank due to “a series of indefinite delays that arose during the regulatory approval process due to the COVID-19 pandemic.”

“Timing is crucial, particularly if the non-credit union is publicly traded and therefore subject to stock fluctuation, causing potentially negative impact on the value of the bargain for one side or the other during the pendency of regulatory review,” wrote VyStar President and CEO Brian Wolfburg. “A timeframe within which the NCUA shall make its decision is therefore important to the parties. We recommend a six-month window — like the FDIC’s standard — as a reasonable timeframe.

There are also concerns regarding how nonmembers — customers of the bank being acquired — affirm their consent to become members. The rule requires the credit union confirm each account is within its current field of membership while also getting consent that those customers are eligible to join.

“This seems to be not only costly and onerous, it seems to be impracticable,” wrote Douglas Wolf, CEO of Minnesota’s Northwoods Credit Union, suggesting that NCUA consider allowing those customers to automatically qualify for membership in a manner similar to when two credit unions merge.

“When a credit union merges with another credit union, such a requirement is reasonable since the members of the merged credit union are also its owners,” wrote Elizabeth Eurgubian, deputy chief advocacy officer at the Credit Union National Association. “However, there is a different dynamic when a non-credit union entity is involved since the customers … are not necessarily the owners of the entity.”

The regulator would be better off, she added, considering an opt-out or even potentially even eliminating this requirement all together.

There are also concerns that NCUA staff may implement the currently proposed rule in differing ways and on different timelines since it merely clarifies preexisting rules, according to a letter from Ann Kossachev, senior director of regulatory affairs at the National Association of Federally-Insured Credit Unions.

“The NCUA should take the necessary steps to continue monitoring regional activity of combination transactions to ensure uniformity and clear expectations for credit unions while balancing the need for attention to the elements of each individual transaction,” wrote Kossachev.

Banks hit back

Not surprisingly, bank groups’ criticism was less constructive. The American Bankers Association argued that credit unions have been “aggressively targeting banks for acquisition to expand their business lines and grow their field of membership outside of their chartered mandate to serve low- and moderate-income individuals.”

The trade group suggested that any credit union over $500 million in assets that attempts to purchase a bank should assume a bank charter upon completion of the deal.

The Independent Community Bankers of America called on the agency to increase the amount of transparency required for credit unions, including disclosing to members factors such as how much of the credit union’s retained earnings are being used to fund the deal, whether credit union management stands to profit from the merger or growth that would come as a result of the acquisition, financial terms of the deal and more.

“ICBA appreciates NCUA’s willingness to address this growing concern. This proposed regulation is a good first step toward addressing uncertainties and disparities that are currently present, but more should be done to stem further mission erosion of credit unions,” wrote Michael Emancipator, VP and regulatory council at ICBA. Emancipator spent two years as a regulatory staffer at NAFCU before moving to ICBA.

Despite the rule being delayed due to the coronavirus, at least one industry group is calling for additional delays. NAFCU’s Kossachev urged NCUA to “delay its finalization of this rule until the COVID-19 pandemic has subsided and the economy begins to revive.”

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