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Community Development Revolving Loan Fund (CDRLF) Advocacy

April 2, 2009

Mr. Michael Fryzel, Chairman
Mr. Rodney Hood, Vice-Chairman
Ms. Christiane Gigi Hyland, Board Member
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia  22314

Dear NCUA Board Members:

I am writing on behalf of the National Federation of Community Development Credit Unions (Federation) to urge your swift action to assist low-income credit unions at a time of unprecedented challenges to their survival. 

As a first step, we request that NCUA amend the regulations of the Community Development Revolving Loan Fund (CDRLF) to permit the issuance of secondary capital loans to low-income designated credit unions, which will enable them to:

  • Maintain and expand their services in distressed communities
  • Increase their regulatory net worth
  • Avoid Prompt Corrective Action (PCA)
  • Minimize the need for mergers and liquidations
  • Provide an additional layer of financial insulation tothe National Credit Union Share Insurance Fund

The agency has informed us informally that such a change in the CDRLF may be made without legislative action.  On behalf of the Federation’s 225 credit unions serving low-income communities, we urge NCUA to initiate all necessary steps to make this change without delay.

Below is our memo in support of this action.  Please contact my office to discuss any implementation issues.

Sincerely yours,

Clifford N. Rosenthal
President and CEO


The Community Development Revolving Loan Fund Should Make Secondary Capital Available to Low-Income Credit Unions

Summary

The credit union industry faces a severe crisis because of the collapse of key wholesale credit unions.  Community development credit unions (CDCUs), which serve low-income communities, have been and will be especially hard hit, as NCUA imposes asset impairments and share insurance premiums are imposed in unprecedented amounts.  The great majority of CDCUs will face operating losses in 2009.  A large percentage of CDCUs will fall below Prompt Corrective Action (PCA) standards for regulatory net worth.  Consequently, they will be subject to increasingly severe regulatory actions that will result in forced mergers and liquidations, thus eliminating vitally needed financial resources for low-income communities.  Credit unions that have served their low-income markets for decades will disappear.

NCUA has a unique resource to mitigate the damage to CDCUs.  The Community Development Revolving Loan Fund (CDRLF), established by Congress in 1979 with a $6 million appropriation, has grown to more than $16 million.  It currently makes non-member deposits and loans at a low interest rate (1%) for five-year terms.  These deposits and loans do not address the critical challenge facing low-income credit unions: namely, sustaining sufficient net worth to continue operations unhindered.  To the contrary, increases in deposits may dilute the net worth ratios of credit unions. 

Low-income credit unions have the unique power to obtain secondary capital loans that count toward minimum net worth requirements (recognized by statute in H.R. 1151, CUMAA).  The CDRLF should shift from providing liquidity deposits and loans to providing secondary capital loans.  This action will provide a source of vitally needed net worth to low-income credit unions, helping to ensure that they can maintain or expand their role in revitalizing their communities, which was the Congressional purpose in creating the CDRLF.

No statutory action or additional appropriation is required to make this change in the CDRLF.  It may be implemented through regulatory action by NCUA.  Because of the unprecedented emergency facing the credit union movement, NCUA can and should make the necessary changes on an urgent and expedited basis.

Impact Analysis

The corporate stabilization plan put forward by NCUA will devastate CDCUs.  Relief is urgently needed.

  • Projected costs to CDCUs:  $55.7 million.    The costs to 217 federally insured CDCUs, based on 12/31/08 financial data, would approach $56 million, including:
    • $24.3 million in NCUSIF impairment expense
    • $10.6 million in NCUSIF premium assessment
    • $20.8 million in expenses for MCS and PIC impairment of investment in corporate credit unions.
  • 87.6% of all CDCUs – 190 of 217 – will be unprofitable (have negative net income) in 2009.  This is a vast increase over 2008.
    • In 2008, an extremely difficult year for the economy and for the low-income sector particularly, 84 CDCUs (38%) were unprofitable.
    • In 2009, assuming economic conditions do not worsen – which does not appear likely – the impact of the impairments and charges will render 190 CDCUs unprofitable, an increase of 126%.
  • The impact on the net worth of CDCUs will be disastrous.  Many will be subjected to Prompt Corrective Action (PCA).   Using 12/31/08 data and factoring in impairment of investments in corporate credit unions:
    • The number of CDCUs with net worth of less than 7% (the threshold to avoid PCA) would more than double, to 31% of all CDCUs (67 institutions). This is an increase of 148%.
    • The number of CDCUs with net worth less than 6% -- the trigger for more stringent PCA regulatory interventions – would more than double, to 20.3% of all CDCUs (44 institutions).  This is an increase of 147%.
  • The impact on CDCUs will be sharper than on the credit union industry as a whole.
    • An estimated 4.13% of all federally insured credit unions would have net worth less than 6% under the corporate stabilization plan.  The proportion of CDCUs is nearly five times higher than all credit unions: our research shows that nearly 20% will have net worth less than 6%.

Secondary Capital can alleviate the crisis faced by low-income credit unions by mitigating the damage resulting from the corporate stabilization plan.  Repurposing the CDRLF to make secondary capital loans to low-income credit unions can achieve the following positive impacts:

  • Avert potential regulatory problems leading to the elimination of low-income credit unions.  Secondary capital investments can increase the net worth of low-income credit unions to acceptable levels, enabling them to avoid the adverse actions resulting from PCA.  Rebuilding primary capital through retained earnings would necessarily be a lengthy and challenging process.
  • Achieve greater impact than CDRLF deposits.  Secondary capital, by enhancing the safety and soundness of low-income credit unions, can enable them to expand lending and services in to low-income communities.   Unless credit unions are well capitalized, they have limited ability to increase vitally needed lending in low-income communities.

Redirecting CDRLF funds to secondary capital is sound and expeditious public policy. 

  • Secondary capital is narrowly targeted to populations and communities in need.  It is exclusively available to low-income credit unions.
  • The proposed change does not require specific legislative action.  NCUA can make the necessary changes in the program through regulations and policy actions.

Legislative Background

Congress has expressed its concern for supporting CDCUs on a number of occasions.

  • In 1979, Congress established the Community Development Revolving Loan Fund for Credit Unions, with an appropriation of $6 million.  It was jointly administered by NCUA and the Community Services Administration.  It was transferred to NCUA’s sole jurisdiction in 1986.
  • In 1998, H.R. 1151 (CUMAA) recognized secondary capital – deeply subordinated debt, subject to all other claims on the net worth of a credit union – as a component of regulatory net worth specifically and uniquely for low-income credit unions. 

In general, there is no legislative history to indicate any constraints on NCUA using the appropriate funds for the purpose of strengthening low-income credit unions in order to revitalize their communities and provide needed financial products and services.  Secondary capital will clearly further these purposes.

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