Changes to Reg-Flex: What Credit Unions Can Do to Prepare

The following is an article reprinted with permission from the upcoming Fall 2010 edition of The WWR Letter:

By: Hannah F.G. Singerman, Associate

Despites the efforts of CUNA, NAFCU, and many individual credit unions, the National Credit Union Administration (“NCUA”) is well on its way to making changes that will impose new restrictions on members and change Regulatory Flexibility (“Reg-Flex”). The proposed Reg-Flex changes impact the percentage Reg-Flex credit unions may invest in fixed assets, the member business loan (“MBL”) rule, stress testing of investments and discretionary control of investments.

Reg-Flex originated in 2002 when NCUA decided to grant certain federal credit unions that had
demonstrated sustained superior performance some specific exemptions from regulatory restrictions in 10 different areas (charitable contributions, nonmember depositions, fixed assets, MBLs, discretionary control of investments, stress testing of investments, zero-coupon securities, borrowing repurchase transactions; commercial mortgage related securities, and purchase of obligations from a federally insured credit union).

Initially, to qualify for Reg-Flex, a credit union needed a CAMEL (capital adequacy, asset quality, management, earnings and asset/liability management) rating of 1 or 2 for two preceding examinations and a net worth ration of 9% or more above the minimum regulatory standard for being “well-capitalized.” NCUA changed the 9% number to 7% for six consecutive quarters in 2006, allowing for more federal credit union eligibility under Reg-Flex.

The proposed changes, as noted above, will place four additional burdens on all credit unions that used to be exempt under Reg-Flex. If the changes happen, even Reg-Flex credit unions will be required to de-invest some of their shared and retained earnings in some fixed assets. The new regulations may require all credit unions to limit their fixed asset investments to 5%. All credit unions should be aware of their percentage investment ahead of time and plan for potential changes in the future.

Another important change involves MBLs. The proposed changes would require Reg-Flex credit unions to obtain personal liability and guarantees from all of the borrower’s principals when making a member business loan. If this change comes to pass, credit unions previously exempt by Reg-Flex should find a way to alert their members of this change and create forms to implement the change ahead of time so that the transition is smooth and members are not unpleasantly surprised. Credit unions need to assure their members that taking on an MBL through the credit union is still advantageous despite this regulation, so as to not lose the competitive advantage that Reg-Flex formerly afforded.

A potentially costly change to Reg-Flex is stress testing. The proposed changes will now require Reg-Flex credit unions to prepare a monthly written report setting out the fair value and dollar change in value for each security held in its portfolio. The report must contain summary information as well. Such monthly testing is expensive and time consuming. Credit unions should
include this testing in their budgets and designate personnel to deal with this new compliance requirement.

Credit unions must be ready to absorb the time and costs of this unfortunate change.

Stress-testing does not only apply to investments as described above, but unfortunately applies to discretionary control of investments as well. This change requires quarterly reports on certain assets and will once again result in further expense for credit unions.

CUNA, NAFCU, individual credit unions and lobbyists have been voicing their objections and concerns to the NCUA. Whether or not the new regulations will pass is not yet known. Nevertheless, credit unions should be prepared for the potential changes and budget time, money and personnel efforts to implement them.

Hannah F.G. Singerman is an Associate in Commercial Collections; Commercial Banking, Commercial Business, Special Collections and Commercial/Agency Services Groups and is based in the Cleveland office. Hannah can be reached at (216) 685-1162 or


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