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NCUA lowers retained earnings requirements to zero

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The National Credit Union Administration will temporarily lift a requirement that some credit unions meet retained earnings standards as part of an effort to help the industry weather the economic fallout from the coronavirus.

The regulator said in a letter to credit unions on Tuesday that it was “reducing the amount of earnings retention required for credit unions classified as adequately capitalized to zero.” Institutions that are adequately capitalized and that are unable to meet earnings retention requirements won’t have to submit written applications to lower retained earnings.

The board approved the administrative order on Friday. It covers any requests credit unions would have needed to submit prior to the end of the second, third and fourth quarters of this year and expires on Dec. 31.

“The agency understands that some credit unions may experience a reduction in earnings and capital due to their COVID-19 response efforts (such as waived fee income, forbearance on loan payments, or an unexpected increase in expenses). The NCUA board determined that a decrease in the earnings retention requirement is necessary to avoid a reduction of shares, to retain system liquidity, and to further the purpose of [prompt corrective action],” the letter, signed by Chairman Rodney Hood, stated.

However, credit unions that are an “undue risk to the Share Insurance Fund” or present a “material safety and soundness concern” may still be required by the regional director to submit a formal request, the letter said. Those that should submit a request will be notified within 45 days before the end of the quarter.

Credit unions that are adequately capitalized as of Dec. 31 and unable to retain 0.1% of assets in the first quarter of next year will need to submit an application.

Additionally, the letter warned, credit unions could see an influx of shares as consumers look for safe places to park their money during the pandemic and recession. Because of that, those institutions that see their net worth ratios decline due to an increase of shares will be able to submit a streamlined net worth restoration plan.

Those that are deemed undercapitalized for the second and third quarters may submit a streamlined plan if share growth is temporary and the primary factor behind the drop in net worth, the letter said.

“The NCUA understands the COVID-19 pandemic is affecting credit unions and their members in unprecedented ways,” the letter said. “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.”

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