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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations increase the risk of credit union failure and risk to the NCUSIF. The Board also notes that adding a line in the Call Report, as recommended by some commenters, would not decrease the potential risk of credit union failure due to loss transmission and would not decrease the risk to the NCUSIF. An added line to the Call Report would only provide information, and not risk mitigation. For these reasons, the Board is retaining the prohibition of an FCU
issuing and investing in Subordinated Debt in the final rule without amendment.
8. Federally Insured, State-Chartered Credit Unions The proposed rule required FISCUs to be subject to largely the same requirements related to the issuance of Subordinated Debt as FCUs. These include, but are not limited to, requirements related to the features and structure of the instrument.
Approximately seven commenters addressed the issue of FISCUs being subject to the requirements of the NCUAs final Subordinated Debt rule.
All but one of these commenters opposed the proposed rule as overly restrictive on FISCUs.
Commenters opposing this proposal stated that it would be in opposition to the dual-chartering system and could stifle innovation among FISCUs that have authorities beyond those of FCUs.
One commenter stated that state regulators are sufficiently equipped to supervise the innovation of FISCUs as it develops.
One commenter also opposed the potential requirement for a FISCU to obtain an opinion that its issuance would not subject the credit union to state and Federal income taxes. This commenter stated that it is not clear that such an opinion would be needed under the proposed structure, because FISCUs would be held to the same standard as FCUs. Further, this commenter, in light of the cost of such an opinion, sought assurance from the NCUA that the request for such an opinion would be the exception rather than the norm.
Finally, as noted previously, one commenter was not completely opposed to FISCUs being subject to the same requirements as FCUs. This commenter stated it was unlikely that any instrument other than Subordinated Debt would be of much interest in the marketplace. Further, this commenter argued that all credit unions issuing the same form of instrument would help the market become more familiar with Subordinated Debt, thereby increasing investor interest and reducing the cost of issuing Subordinated Debt. This
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commenter did state, however, that while they saw benefits to all credit unions issuing the same instrument, they did not believe that a FISCU which was permitted by state law to issue a Subordinated Debt hybrid instrument should be restricted from doing so by the proposed rule.
As stated in the proposed rule, FISCUs may not be restricted under applicable state law and regulation to issuing only debt instruments. However, as administrator of the NCUSIF the Board continues to believe the framework for the types of instruments that would qualify for Regulatory Capital should be consistent for all credit unions. The Board notes that such structure may also help FISCUs retain their tax exemption, as debt issuances are likely not to be viewed as capital stock issuances.35
While the Board fully supports the dual-chartering system and innovation among all credit unions, it notes that all LICUsboth federally and statecharteredare currently subject to the same Secondary Capital or Prompt Corrective Action requirements.
Further, as articulated in the proposed rule, FISCUs may only issue Subordinated Debt if permitted under state law. The Board believes that requiring consistency among the types of instruments issued for Regulatory Capital treatment is in the best interest of both the NCUSIF and FISCUs. As such, the Board is finalizing, as proposed, those provisions that apply to FISCUs without amendment.
9. Prepayment The proposed rule required a credit union to receive prior written approval from the Appropriate Supervision Office before the credit union prepays Subordinated Debt. Approximately five commenters addressed the issue of prepayment. The majority of these commenters sought a removal of the application process to prepay Subordinated Debt or a shortening of the timeframe for the NCUA to render a decision on such application.
These commenters stated that an application process was in opposition to the requirements contained in the OCCs regulation and could put credit unions at a competitive disadvantage. These commenters recommend allowing adequately capitalized credit unions to prepay any portion of their Subordinated Debt for which they no 35 State chartered credit unions without capital stock, organized and operated for mutual purposes and without profit are exempt from Federal income tax under Internal Revenue Code 501c14A. 26
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longer receive regulatory credit without prior regulatory approval.
In addition, one commenter stated that the NCUA should allow credit unions to draft agreements that allow for the redemption of discounted capital so they could count the remaining balance, in whole, as capital.
Another commenter stated that credit unions should have the flexibility to structure Subordinated Debt agreements with the ability to refinance the debt if the parties agreed to the concept of refinancing within an outlined placement agreement.
Finally, one commenter stated that inclusion of prepayment obligations and acceleration features is common in the capital markets, even for deeply subordinated instruments, and would be expected by many market participants.
This commenter went on to recommend the NCUA allow for these features particularly because the NCUA can protect the issuer and the NCUSIF by requiring an issuer to receive NCUA
approval before making any payments.
The Board has reviewed the comments relating to prepayment of Subordinated Debt and will retain the provision of receiving prior approval in the proposed rule, with a 45-day timeframe for the NCUA to approve the application. While the 45-day approval timeframe is similar to the Secondary Capital Rule, the Board has eliminated the provision for automatic approval if a credit union is not notified of a decision by the Appropriate Supervision Office within the 45 days.
The Board believes the regulatory relief in the proposed rule, including the ability to prepay any portion of the Subordinated Debt and a streamlined application compared to the Secondary Capital Rule, provide sufficient regulatory relief to offset any burden imposed by removing the automatic approval. However, the Board sees the requirement for preapproval for prepayment as an important way to confirm that a credit union has sufficient capital and liquidity to repay Subordinated Debt without unduly increasing risk to the NCUSIF.
10. Limits on Loans to Other Credit Unions The proposed rule included a new single-borrower limit for FCUs that make loans to other credit unions. The single-borrower limit would be the greater of 15 percent of an FCUs Net Worth or $100,000, plus an additional 10 percent of an FCUs Net Worth if that additional 10 percent is fully secured at all times with a perfected security interest by readily marketable collateral
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