NCUA Proposes Rule to Revise Conversion Processes, RegFlex

March 23, 2010- The National Credit Union Administration (NCUA) recently released a couple of proposed rules with a 60-day comment periods, one of which addresses credit union to bank conversions, as well as insurance conversions.

A new subpart of Part 708a establishes procedural and substantive requirements for a federally insured credit union to convert to a bank. These new rules would also apply to both direct mergers and transactions where the credit union first converts to a mutual savings bank (MSB) and then merges with another bank without ever operating as an MSB. The proposed rule also enhances the voting process integrity and requires additional disclosure to members regarding charter or insurance conversions costs and other effects of those changes.

Prior to this revision, the agency did not have regulations dictating fiduciary duties for federal credit union directors, another part of this proposed rule. State credit union board members refer to individual state laws for their fiduciary duties. The proposed rule can be accessed here.

The NCUA also approved a proposed rule, 701, 723 and 742, revising the agency's Regulatory Flexibility (RegFlex) program for federal credit unions. The changes apply to provisions affecting fixed assets, member business lending (MBL), stress testing of investments and discretionary control of investments.

The MBL rule, Part 723, requires a credit union making a business loan to obtain the borrower's personal liability and guarantee as part of the rule's collateral and security requirements. State-chartered federally insured credit unions (FISCUs) are required to comply with §723 unless their state has received an exemption pursuant to §723.20. See §741.203. Currently, §723.7(b) provides that RegFlex eligible credit unions may forego the personal guarantee of the borrower.

NCUA proposes to rescind the exemption for RegFlex credit unions. In the proposal, NCUA states that "obtaining the borrower's personal guarantee is a prudent underwriting practice that greatly enhances the likelihood of loan repayment and should be required of all credit unions." NCUA notes that increasing losses and delinquencies in MBL portfolios are becoming more common. While NCUA proposes to eliminate the Reg Flex exemption from the personal guarantee, the Agency would retain the option for credit unions to seek a waiver of the guarantee requirement under 723.10(e) on a case-by-case basis.

As stated above, this proposed change would not affect state-chartered credit unions with NCUA approved MBL state specific rules. To view a summary of the RegFlex rule, follow this link.