Banking

NCUA readies $369M payout tied to corporate credit union failures

The National Credit Union Administration said Thursday it plans to distribute $368.7 million to institutions that were members of three corporate credit unions that failed during the financial crisis.

Approximately 2,000 credit unions are expected to receive payouts by the end of April, and they could receive at least one more distribution later this summer, Keith Morton, president of NCUA’s Asset Management Assistance Center, said Thursday during a virtual meeting of the agency’s governing board.

The monies are the result of the maturation of the agency’s Guaranteed Note Program, which was created in 2010 following the failure of five corporate credit unions that had purchased faulty mortgage-backed securities.

According to Morton, NCUA officials are currently calculating distribution amounts for each institution and plan to send letters notifying them shortly. Payouts are expected by the end of April.

Institutions that were members of the failed U.S. Central Federal Credit Union will receive $150 million, members of Members United Corporate will see a total of $126.2 million and Southwest Corporate stakeholders can expect $92.5 million.

April’s disbursement will be the second for former Southwest Corporate members. They received $171 million last fall.

NCUA Chairman Todd Harper credited his predecessors and other board members, as well as agency staff, noting that few would have predicted any distributions in 2011, after NCUA was forced to liquidate five corporate credit unions and faced the prospect of tens of billions of dollars in losses.

“As we wind down the remaining asset management estates, we will continue to minimize costs and maximize returns,” Harper said. “In doing so, we will fulfill our fiduciary responsibilities as both the conservator and liquidator of the failed corporate credit unions and return even more funds to capital holders.”

“I fully appreciate the difficulties faced by the entire credit union system during the Great Recession,” Vice Chairman Kyle Hauptman added. “The Herculean efforts and difficult decisions made to ensure the safety and soundness of credit unions are undeniable. I’m grateful to be here now.”

However, NCUA has not gotten to this point easily. Board member Rodney Hood noted that the agency has paid approximately $1.3 billion in legal fees in its efforts to recover damages from institutions that sold highly speculative mortgage-backed securities to the corporate credit unions in the years leading up the financial crisis.

To date, NCUA’s lawyers have collected more than $5 billion, but their contracts allow them to keep a quarter of that amount.

That arrangement was problematic for Hood.

“I realize we wouldn’t have gotten any money back without [lawyers’] efforts but is there any way we could renegotiate those agreements?” Hood asked Frank Kressman, NCUA’s general counsel.

Kressman said he would explore the possibility of renegotiating the contracts. In an answer to another question from Hood, Kressman disclosed that the deals were not negotiated through the agency’s normal competitive process.

With these payments, NCUA will have returned roughly $540 million to institutions that owned a share of the failed corporates, but there could be much more to come. Representatives for the agency said it is believed as much as $2.3 billion could ultimately be distributed to institutions that held capital in the corporates.

In other actions, the board on Thursday approved a pair of interim final rules. The first extended temporary enhancements to its Central Liquidity Facility through the end of 2021. The second allows large credit unions to use pre-COVID asset data to determine applicability of stricter capital planning and stress testing. Those requirements typically kick in when an institution crosses the $10 billion-asset threshold.

Congress authorized the changes to the CLF in the stimulus legislation it enacted Dec. 27, including extending the increased borrowing capacity that was originally put in place last spring in the Coronavirus Aid, Recovery and Economic Security Act, or the CARES Act. The board’s latest action, then, brings its regulations into conformity with the latest stimulus law, the Consolidated Appropriations Act of 2021.

According to NCUA, five credit unions have crossed the $10 billion-asset threshold over the past year, while at least four more are likely to do so soon. For many of these institutions, their growth is tied directly to liquidity unleased by unprecedented stimulus measures the government has undertaken in response to the COVID crisis.

Thursday’s rule mirrors one banking regulators implemented in November to help community banks that found themselves in a similar fix.

“Because the asset growth was rapid and unexpected, many of these institutions have not adequately planned and budgeted for these transitions,” Harper said. “This interim final rule gives affected federally insured credit unions more time either to reduce their balance sheets or to prepare for higher regulatory standards.”



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