NEWS: Effective April 1, Wisconsin’s Office of Credit Unions (OCU) is updating its rules to give state-chartered credit unions equal footing with federal credit unions (FCUs) when it comes to issuing subordinated debt.
Subordinated debt involves credit unions borrowing money from investors, subject to NCUA requirements that prescribe the loan’s structure, terms and other issues. It gets favorable regulatory capital treatment because of its subordination to other creditors.
Only low-income credit unions (LICUs) may issue secondary capital under current state law. By changing state rules to mirror federal law, the OCU will now also let newly chartered credit unions and “complex” credit unions (i.e., credit unions with assets greater than $500 million and without a low-income designation) issue subordinated debt for purposes of regulatory capital treatment.
Currently, DFI-CU §75.03(1) says that state-chartered LICUs may accept secondary capital accounts, subject to the same federal requirements that apply to FCUs. The state rules cross-reference NCUA regulations, but those references have become outdated because the NCUA rules on subordinated debt changed significantly on Jan. 1, 2022. To keep pace, the OCU is amending its rules to cross-reference the new NCUA regulations (which are found in Part 702, Subpart D, of the NCUA Rules). For example, the NCUA rules now refer to secondary capital issued before Jan. 1, 2022, as “grandfathered secondary capital,” while secondary capital issued after that time is called “subordinated debt” and is subject to new requirements. The OCU rules now use that same terminology, and not the now-obsolete term “secondary capital accounts.”
NCUA rules changed Jan. 1
This whitepaper from a prominent national banking law firm does a nice job of summarizing the NCUA subordinated debt rules that took effect Jan. 1 – which state-chartered credit unions will also have to follow. The whitepaper explains:
Most significantly, the [new NCUA rule] would, for the first time, provide federally insured credit unions … with more than $500 million in assets and without a low-income designation access to additional capital outside of retained earnings. Specifically, these credit unions would be permitted to sell subordinated debt to certain qualifying investors and use the proceeds to satisfy the NCUA’s new risk-based capital ratio that will take effect on January 1, 2022 …, which will require them to hold capital at least equal to 10% of their risk-weighted assets.
The article goes on to list other highlights of the NCUA’s new regulations, including these:
- Permitting LICUs to continue to include issued subordinated debt in their net worth and Risk-Based Capital Ratio calculations; while complex credit unions without a low-income designation would be eligible to include issued subordinated debt in their Risk-Based Capital Ratio calculation (but not in their net worth calculation);
- Limiting eligible investors of subordinated debt to “accredited investors” as defined by the Securities and Exchange Commission, which includes natural persons and entities;
- Providing specific requirements for the subordinated debt instrument, such as having a maturity of at least five years but no more than 20 years, and being unsecured, issued pursuant to written contractual agreement(s) and subordinate to all other claims against the issuing credit union;
- Prohibiting a credit union from being both an issuer and investor in subordinated debt; and
- Providing specific application procedures for obtaining NCUA pre-approval to issue subordinated debt, as well as required disclosures that must be made to potential investors in the offering documents and the subordinated debt promissory note.
NCUA Rules & Regulations 12 CFR Part 702, Subpart D sets forth the requirements applicable to all subordinated debt issued by a federally insured, natural person credit union, including the NCUA’s review and approval of that credit union’s application to issue or prepay subordinated debt.