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Summary of Section 4016 of the CARES Act: Temporary Credit Union Provisions

Kaden J. R. Weaver
3/31/20

brief case of $100 bills   Section 4016 of the CARES Act makes temporary changes to the Federal Credit Union Act (FCUA), specifically Subchapter III – Central Liquidity Facility. This Subchapter establishes a National Credit Union Central Liquidity Facility (Facility). The Facility helps provide financial stability to credit unions by serving as a liquidity lender to credit unions experiencing unusual or unexpected liquidity shortfalls.  Member credit unions own the Facility, which exists within the National Credit Union Administration (NCUA) whose Board (Board) has oversight over the Facility. There are typically two types of members of the Facility, natural-person credit unions and corporate credit unions. Normally only natural-person credit unions may borrow from the Facility either directly as a regular member or indirectly through an agent member. It should be noted that the following changes made by the CARES Act are limited to federally chartered credit unions. State chartered credit unions are not affected by any of the changes made in the CARES Act. 

            The temporary changes the CARES Act has made to the FCUA are: 

  1. allow corporate credit unions to borrow to address their liquidity needs,
  2. makes it easier for credit unions to become agent members of the Facility,
  3. changes the requirements for an extension of credit for a borrowing credit union, and
  4. allows the Board to borrow against a larger percentage of the Facilities subscribed capital stock and surplus.

These changes were made in order to allow credit unions to continue to provide credit and cash to their customers. 

Liquidity Needs

    In the FCUA “liquid needs” means “the needs of credit unions primarily serving natural persons . . . .” The CARES Act removes the ‘primarily serving natural persons.’ By removing this language, the CARES Act allows corporate credit unions to borrow under the FCUA Subchapter III.

Agent Members

   Next the CARES Act makes it easier for credit unions to become agent members of the Facility. For a credit union to be able to borrow from the Facility they must be either a member of the Facility or borrow from an agent member of the Facility. Under the FCUA, one requirement for a credit union to become an agent member is by “subscribing to the capital stock of the Facility in an amount not less than one-half of 1 per centum of the paid-in and unimpaired capital and surplus of all those credit unions . . . .” The CARES Act removes the italicized language and replaces it with “. . . such credit unions as the Board may in its discretion determine . . . .” This allows the Board to determine how much of the potential agent member must invest in the Facility. This provides flexibility to the Board to allow more credit union to become agent members of the Facility. 

Extensions of Credit

   The third change the CARES Act made to the FCUA deals with extensions of credit to a member who has borrowed from the Facility. Before the CARES Act, if a member of the Facility applied for an extension of credit, the Board would not approve the application if the intent of the member was to expand their credit union portfolio. However, the CARES Act removes that criterion and states that an extension of credit will not be granted if the credit union applying for the extension does not first show they have made “reasonable efforts to first use primary sources liquidity of the applicant, including balance sheet and market funding sources, to address the liquidity needs of the applicant.” This increases the burden of the applicant credit union to show that they have used other methods to address their liquidity issues. 

Borrowing

   The final change to the FCUA that the CARES Act expands the amount of liquidity a credit union may access. Under the FCUA a credit union has the power to “borrow from -- any source, provided that the total face value of these obligations shall not exceed twelve times the subscribed capital stock and surplus of the Facility.”  However, the CARES Act allows a credit union to borrow “provided that, the total face value of such obligations shall not exceed 16 times . . . .” This allows a credit union to borrow a greater amount than what they would normally be allowed to. Therefore, allowing more credit to be extended to the Facility’s members. 

   All the above-mentioned changes made in the CARES Act, have a sunset date of December 31, 2020. After that date, all changes made will revert back to the FCUA’s original language.  Should you have any questions regarding these changes, please contact one of our business attorneys.

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Disclaimers:

At the date of publication the above information was correct.  It is quite possible the information above has changed as COVID-19 is a rapidly evolving situation. 

The article in this publication has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.