NEW YORK—The National Federation of Community Development Credit Unions said NCUA’s recent revisions to supervisory policies regarding secondary capital align the purpose of the loans to the needs of credit unions and the “realities” of investors.
“There are now clear and objective measures by which credit unions can apply and be approved for pre-payment of secondary capital,” the Federation stated in a release.
The Federation noted that until now secondary capital loans have been structured solely as interest-only, balloon payment loans with a decreasing portion counted toward capital each year. “Though secondary capital loans have existed for over a decade, they remain largely underutilized because the risk assessed by investors has generally maintained interest rates at 5% and above; during its final five years, the loan becomes a costly liability,” the Federation stated.
The Federation said it has worked closely with NCUA to establish a clear process for principal repayment approval to lower the cost for the product, enabling credit unions to put the capital to productive use in low- and moderate-income communities.
"The Federation commends the NCUA for this major step in aligning the purpose and structure of secondary capital loans to the needs of credit unions and the realities of investors,” said Federation President Cathie Mahon in a statement. “The ability to pre-pay portions of secondary capital loans will help growing credit unions continue on a path of increasing membership and lending in underserved communities.”
In its discussions with socially responsible investors and other financial institutions, the Federation said it found that the former structure of all secondary capital loans did not meet the cash flow needs of many investors.
"We're proud to have partnered with the Federation to enable investors to increase their commitment to working with community development credit unions to better meet the financial needs of low-income people, and we look forward to continuing to support these efforts," said Dan Letendre, managing director, community development financial institutions, Bank of America.