Credit Unions Rising

Background

The National Credit Union Administration has proposed legislation within HR 1106 to provide a Corporate Stabilization Fund for the National Credit Union Share Insurance Fund. The trust would be funded by borrowings from the Federal Financing Bank, initially in an amount of $6 billion. Subsequent reports now suggest the authorized borrowing amount could be increased up to $30 billion.

NCUA’s reason for the borrowing request is due to their $5.9 billion credit loss estimate in the Corporate Credit Union Network’s investment portfolio. This estimate of future credit losses, in which estimated losses as far as 10 years or more in the future are being present valued for credit unions to expense today, combined with the $4.0 billion of cooperative capital in Western Corporate (WesCorp) and U.S. Central Credit Unions that has been deemed impaired and required to be written off, is imposing an unnecessary burden on credit unions’ ability to continue meeting the needs of their members and communities. Given the nation’s ongoing economic uncertainty, and the credit union system’s strong results in providing funding for mortgage, consumer and student loans in the midst of this environment, imposing such a burden will only inhibit the economic recovery.

For the reasons outlined below, we believe this legislation requires greater examination before further action is taken to approve this funding. We do support legislation directing NCUA to align the costs of potential losses from the corporate network with NCUSIF annual premiums as these losses are actually incurred in future years.

Basis and Reasoning for Petition

We request the appropriate committees of Congress gather more information before approving this funding for the NCUSIF for the following reasons:
• The NCUA already has substantial existing resources available to support any Corporate Credit Union liquidity needs and therefore does not need additional borrowing authority. The NCUSIF via the Central Liquidity Facility has the ability to borrow up to CLF’s appropriated limit which is currently $41 billion. Of this limit, at March 31, 2009 only $942 million has been used to provide direct liquidity to natural person credit unions.
• The credit union system has ample liquidity. Investments currently total over $225 billion, over half of which mature in less than one year. In the first two months of 2009, NCUA reported that over $12 billion additional funds were placed in the Corporate Credit Union Network by Natural Person Credit Unions (NPCUs) virtually eliminating any need for external borrowings.
• As now drafted, all borrowings under this proposal would be repaid by NCUSIF premiums in future years, further encumbering the earnings of credit unions. Credit unions could be put in position of potentially having no capital creating capability for years into the future. With no capital, there would be no way to serve increasing member needs. Credit unions’ only source of capital is earnings. If the final bill were to include the full amount of $30 billion, as some supporters and NCUA have requested, and this amount were to be drawn down, the indebtedness would be equivalent to over 12 times the total 2008 net income for all credit unions.
• Given the uncertainty of losses extending years into the future, we believe greater transparency of NCUA’s modeling and data must be made available before any funds are appropriated. NCUA spokespersons have used widely varying estimates of the potential losses from the Corporate Credit Union Network. These have ranged from $40-$50 billion (John Kutchey- Acting Director of Examination and Insurance in a NAFCU webinar), to $7, $10, or $16 billion depending which PIMCO scenario is used (Dave Marquis, NCUA’s Executive Director), to the $4.7 billion (NCUA’s initial system costs on January 28, 2009).

Lack of Transparency throughout Corporate Conservatorship Actions

This lack of transparency has been a major factor in credit union concern about NCUA’s actions which are the basis for this funding request. One state regulator has commented as follows in responding to NCUA’s request for proposals on future steps for the Corporate Credit Union Network:

The drastic losses to credit unions and the lack of suitable information provided to those experiencing these losses cries for transparency. The Kansas Department of Credit Unions (KDCU) statutorily is responsible for the safety and soundness of Kansas credit unions, but has been denied access to information used by NCUA as justification to conserve U.S. Central Credit Union. . . Kansas credit unions have contacted the department requesting information utilized by NCUA in the decision to place U. S. Central FCU into conservatorship that NCUA has not made available. KDCU routinely Provides information to NCUA; flow of information must be a two-way effort. The current situation is unacceptable.
Letter from John P. Smith, Administrator, Kansas Department of Credit Unions, March 30, 2009 to Secretary to the NCUA Board

Credit unions are cooperatives. There are no separate ownership interests held by private investors. Credit unions have never used taxpayer funds; instead the industry has funded its own liquidity lender, the Central Liquidity Facility and has provided all of the capital for its insurance fund, the NCUSIF. All the assets held by the different components of the credit union system belong to its 90 million members.

The capital of credit unions, whether in the individual credit union, a corporate, the NCUSIF or the CLF, is “common wealth” to be used in the best interests of the members. The NCUA, similar to each credit union, is a steward for this capital. The NCUA has not provided the credit union community, the only source for all credit union capital, with information that would support the $10 billion in expenses for losses now imposed and the reason for this legislation. We believe it is in the interest of our members, the Congress and the American public that there be a full disclosure and review of how NCUA has determined losses on investments that no other regulatory system has been able to achieve.

Therefore we are requesting that the Congress take the following actions:

1. Hold public hearings on this NCUA proposal and seek the “modeling” details that are the basis for these loss estimates as well as expert commentary on this approach;

2. Direct NCUA, pending any legislation, to align the insurance premiums of the corporate stabilization plan with the actual losses as incurred;

3. To further the self reliance of the cooperative charter, evaluate and add to any legislation the authority of credit unions to issue shares to members that would function as capital;

4. Request from NCUA a cooperative proposal, developed in collaboration with the credit union system, for enhancing the cooperative charter in all areas of lending and savings.