Supplemental capital discussed – but tax challenges ahead

Oct. 27, 2016 -- Supplemental capital – and its use by credit unions – will be the subject of a likely January “advance notice of proposed rulemaking” by NCUA, but the issue itself won’t be without its challenges.

Among them: whether state chartered credit unions (SCUs) will be able, under the law, to maintain their federal tax exemption while issuing supplemental capital.

At the open, regular meeting of the NCUA Board Thursday, Chairman Rick Metsger noted that supplemental capital (for purposes of risk-based capital) has been an issue among credit unions for some time. He added that the ANPR that will come forth in January is “the first we’ve done” since he instituted his “board briefings” to discuss issues coming before the board. “We’ll move as expeditiously as possible,” Metsger said – then adding there are issues to be considered, specifically naming the tax exemption for state-chartered credit unions.

In a presentation about supplemental capital, Larry Fazio – NCUA director of the office of examination and insurance – pointed out that federal credit unions have a specific tax exemption from “all taxation now or hereafter imposed by the United States or by any State, Territorial, or local taxing authority,” with the exceptions of real and personal property taxes.

SCUs, Fazio pointed out, have a slightly narrower exemption under the federal code, which states that the an exemption from federal income tax exists for “credit unions without capital stock organized and operated for mutual purposes without profit” (as written in the federal tax code). Fazio pointed out that there is no definition for “capital stock,” and that the Internal Revenue Service may need to provide rulings for individual issuances of supplementary capital.

NASCUS President and CEO Lucy Ito said the state system will work closely with NCUA in addressing the tax exemption issue – and others. "Supplemental capital is an important tool in enhancing credit union safety and soundness, and the state system must be part of the discussion to ensure that both federal and state credit unions have the opportunity to use this tool, and that neither be at a disadvantage. NASCUS has a long record of supporting this critical safety and soundness enhancement, and will continue to build that record.”

Fazio also pointed out that, in order for the agency to issue a rule, it would have to address changes in at least 12 other existing agency rules -- and add at least eight additional regulations (covering such things as anti-fraud requirements, dealer-broker requirements, disclosures, insider purchase limits and disclosures and more).

There are also some potential areas of relaxation of agency rules, Fazio said, including removing the borrowing limits on federally insured, state chartered credit unions; allowing non-institutional investors to purchase secondary capital; allowing non-institutional investors to purchase secondary capital, and more.

In other action Thursday, the NCUA Board:

  • Approved a new field of membership (FOM) rule for federal credit unions designed to “improve consumer access to affordable credit,” according to an NCUA release. (Board Chairman Rick Metsger acknowledged during the meeting that “numerous states that have updated their FOMs. Many of these were successfully updated years, even decades ago.”). The rule takes effect 60 days after publication in the Federal Register.
  • Issued for comment a new proposed rule on FOM that incorporates a number of comments received on the FOM rule to “provide further field-of-membership community charter options for federal credit unions” (with a 30-day comment period).
  • Officially renamed the NCUA’s consumer office as the “Office of Consumer Financial Protection and Access”
  • Adopted a final rule adjusting civil monetary penalties for inflation (required by Congress).
  • Approved an interagency proposed rule to implement private flood insurance requirements for loans in special flood hazard areas contained in a 2012 statute.


Presentation to NCUA Board: Supplemental capital