After years of saying the Temporary Corporate Credit Union Stabilization Fund could not be closed until 2021, the National Credit Union Administration now is in the process of potentially closing the Stabilization Fund as early as Oct. 1.

The regulator on Wednesday put out an urgent call for comments, which it says are needed by Sept. 5 so the NCUA board has the option to take those comments into account at its September board meeting.

In a webinar hosted by the regulator Wednesday, Larry Fazio, director of NCUA's Office of Examination and Insurance, said two major developments have allowed the possibility of an accelerated distribution to credit unions that paid assessments. The first is NCUA repaying Treasury in full in October 2016, the second is the nearly $4 billion in net legal recoveries – most of the latter related to sales of mortgage-backed securities to corporate credit unions. Those recoveries haven’t been without controversy, however, as they also generated a legal bill of more than $1 billion, which recently attracted the eyes of members of the House Financial Services Committee.

NCUA is proposing closing the Stabilization Fund on Oct. 1, using financial statements as of Sept. 30. Fazio said this would result in a distribution to credit unions in the second quarter of 2018. Individual shares would be determined at a later date.

All assets and liabilities from the Stabilization Fund would be transferred to the National Credit Union Share Insurance Fund. Currently, the Share Insurance Fund is mandated by the Federal Credit Union Act to maintain an equity ratio of not less than 1.2 percent and not more than 1.5 percent. Fazio said because of remaining obligations, including the NGNs, the Share Insurance Fund would have to maintain a higher equity ratio.

“NCUA had to re-evaluate the normal operating level,” he explained. “If the Stabilization Fund closed, we have to calculate economic stress given a possible moderate recession or a severe recession.”

Larry Fazio, director of NCUA's Office of Examination and Insurance
Larry Fazio, director of NCUA's Office of Examination and Insurance

If the Share Insurance Fund’s equity ratio were to dip below 1.2 percent, the NCUA board would have to impose a mandatory premium on credit unions or trigger a restoration plan. To prevent this scenario from happening, Fazio said the regulator has calculated a proposed normal operating level of 1.39 percent.

If the proposal is approved in September and the Stabilization Fund is closed on Oct. 1, credit union can expect a distribution of $600 million to $800 million in Q2 2018. Future distributions are possible depending on economic conditions and performance of the legacy assets.

In 2021, those CUs that lost equity in corporate credit unions could potentially see recoveries from Southwest Corporate, Members United or U.S. Central. The estate of WesCorp is “not even close” to paying recoveries, and Constitution Corporate is “close” but will be determined, Fazio said.

“Please take the time to comment by September 5,” Fazio said to attendees of the Webinar. “If we cannot close the Stabilization Fund by the end of the calendar year, then we would not be able to do a distribution until the following year, 2019.”

The Stabilization Fund was created in May 2009 and funded by insured credit unions, which paid a total of $4.8 billion in assessments, along with borrowings from the U.S. Treasury. The Stabilization Fund has been used to account for the costs of the Corporate System Resolution Program and provide short-term and long-term funding to resolve a portfolio of residential mortgage-backed securities, commercial mortgage-backed securities, other asset-backed securities, and corporate bonds, collectively referred to by NCUA as Legacy Assets. Under the Corporate System Resolution Program, NCUA created a re-securitization program where NCUA issued a series of NCUA Guaranteed Notes that were sold to investors to provide long-term funding for the Legacy Assets.

Interested stakeholders can send comments to NCUA via e-mail at: Commenters should include their name and the phrase “Comments on Stabilization Fund Closure” in the subject line of the message.

The NCUA website also has a dedicated page on the proposed closure that includes a link to “board comments.”

For those who still own a fax machine, fax comments to: 703-518-6319.