NCUA May Allow Voluntary Prepayment of Corporate Assessments

If there’s not enough interest among CUs, the program won’t be implemented.

May 19, 2011

Although the Federal Credit Union Act doesn’t allow NCUA to charge a mandatory prepaid assessment for credit unions’ corporate credit union stabilization fund assessments, it may allow voluntary prepayments to improve the liquidity of the Temporary Corporate Credit Union Stabilization Fund.

That was the word from Thursday’s NCUA Board meeting.

The crux of the agency’s proposal:

• To the extent there’s voluntary participation in the prepaid assessment program, there will be a reduction in the assessments all credit unions will be required to pay in 2011 and 2012.

• Subject to some limitations, NCUA will permit a credit union to prepay corporate stabilization assessments by up to 36 basis points (bp) of insured shares this year. The minimum amount that a credit union could advance would be $10,000.

• These prepayments would then become an “account” (a prepaid asset) from which actual assessments in 2013, 2014, and later could be paid. These prepayments would essentially amount to interest-free loans to the Stabilization Fund, and would reduce the size of the required assessments in 2011 and 2012.

Also, the prepayments would be an asset purchase rather than an expense, and would not be expensed until used to cover assessments in 2013 and beyond.

NCUA will solicit interest by credit unions in the program before finalizing it. If “subscriptions” by credit unions total less than $300 million, the program will not be implemented.

• CUNA estimates that if all eligible credit unions participate to the maximum extent permitted, the 2011 assessment to all credit unions would be around 10 bp instead of 25 bp. Next year’s assessment would likely be around 10 bp instead of 13 bp.

Subsequent assessments would likely be around 9 bp and would gradually decline as total insured shares in credit unions grow. This assumes no change in the expected losses on the legacy asset portfolios over the life of the program and using the full 11 years of the stabilization fund to cover the costs.

• Participation by any credit union would essentially involve granting the corporate stabilization fund an interest-free loan for a few years. At current interest rates, there would not be substantial opportunity costs, but rates could be higher next year and the year after.

CUNA is preparing an analysis of the proposal, which will provide information on how much assessment rates are likely to adjust assuming different levels of participation by credit unions.

Meanwhile, NCUA is seeking comments regarding the program. More specifically, the agency is urging credit unions to let them know:

  • Whether credit unions are willing to participate in the program;
  • Suggestions for improvements;
  • Accounting considerations; and
  • Any public policy concerns.

CUNA commended the agency for putting forward a proposal on prepayments for consideration by the credit union system. CUNA will provide more information and guidance to credit unions on how the prepayment plan would work, and will solicit comments from credit unions on improvements and concerns.

NCUA will hold a webinar next week on the proposal.