Temporary Regulatory Relief in Response to COVID–19 — Prompt Corrective Action

Temporary Regulatory Relief in Response to COVID–19 — Prompt Corrective Action (Part 702)

April 2022

Prepared by NASCUS Legislative & Regulatory Affairs Department

NCUA issued an Interim Final Rule (IFR) to reenact 2 temporary changes made to part 702, Prompt Corrective Action (PCA) to provide regulatory relief to federally insured credit unions (FICUs) during the COVID–19 pandemic. The first change enables NCUA to issue orders applicable to all FICUs to waive the earnings retention requirement for any FICU that is classified as adequately capitalized. The second change modifies requirements for specific documentation required for net worth restoration plans (NWRPs) for FICUs that become undercapitalized.

These changes will be in place until March 31, 2023. This rule is substantially similar to an interim final rule that the Board published on May 28, 2020. (NASCUS’s comment letter in response to the 2020 IFR may be read here) and reenacted in April, 2021 (NASCUS’s comment letter in response to the April, 2021 IFR may be read here).

Comments must be received on or before April 29, 2022. The IFR may be read in its entirety here. The rule became effective February 28, 2022.

Summary

NCUA has chosen to extend the PCA relief provisions first promulgated in 2020 in response to the COVID-19 pandemic’s effect on credit union balance sheets, and again in 2021. NCUA notes that share growth remains unusually high compared to pre-pandemic levels and the agency expects the potential for greater volatility to continue.

Accordingly, NCUA proposes to extend the flexibility in managing the earning retention and restoration plan provisions of PCA. One change in this IFR from the previous IFRs is that NCUA is incorporating

The Board notes that this interim final rule incorporates new language accommodating changes made by the implementation of the 2015 Risk-Based Capital rule (RBC final rule) on January 1, of this year. Specifically, the RBC final rule amended Part 702 by removing §§ 702.201 and 702.206 and moving them to new §§ 702.106 and 702.111.

  • Part 702.106 earnings retention requirement for credit unions classified adequately capitalized

The purpose of existing § 702.106 is to restore a FICU that is less than well capitalized to well-capitalized in an incremental manner. Part 702.106 currently allows NCUA to waive the restoration requirement on a case-by-case basis upon submission of an application for waiver by a FICU.

In light of the ongoing economic issues related to the pandemic, NCUA is re-enacting/extending the IFR provision allowing a blanket waiver of the earning retention requirement under PCA for adequately capitalized credit unions. The NCUA Regional Director may still require an application from a specific credit union should the situation so warrant.

  • Part 702.111 Net Worth restoration Plans (NWRPs) for FICUs that become undercapitalized

Pursuant to the FCUA, a FICU that is less than adequately capitalized must submit a NWRP to the NCUA. NCUA implements this provision through § 702.111. NCUA has determined that it is appropriate to waive the NWRP content requirements for FICUs that become classified as undercapitalized predominantly as a result of pandemic related share growth.

With this change, a FICU may submit a significantly simpler NWRP to the NCUA Regional Director attesting that its reduction in capital was caused by share growth and that such share growth is a temporary condition due to the combination of the pandemic and federal stimulus payments to taxpayers. (FISCUs must comply with applicable state requirements when submitting NWRPs for SSA approval.)

When reviewing an NWRP submitted pursuant to this provision, the NCUA RD analyze the numerator and denominator of the net worth ratio:

  • No change, or an increase in the numerator and an increase in the denominator, would indicate that the decrease in the net worth ratio was due to share growth.

However, if there is an increase in the denominator and a decrease in the numerator, the NCUA RD will analyze whether the decrease in the numerator would have caused the credit union to fall to a lower net worth classification if there were no change in the denominator.

  • If so, the FICU’s net worth decline would not be predominantly due to share growth and the credit union would not be eligible to submit a streamlined NWRP.

NCUA notes that based on September 30, 2021, Call Report data, 59 credit unions would require an NWRP to be in place or be submitted for approval based on their PCA classification (up 22% from the 48 credit unions as of December 31, 2020).

This IFR will automatically expire on March 31, 2023.